Question

Describe and explain all types of risk in financial market?

What risks exist in the bond and share markets? and how these risks affect the bond and share market?

Answer 1

There are various types of risk in financial market. They are as follows-

A. Market risk-these are also called systematic risk and this cannot be completely eliminated, because these are risk of operational into the market.this includes various type of risk like interest rate risk and currency risk along with equity risk and these are mostly macro risk in nature

B. Liquidity risk-this is the risk associated with selling out on investment and getting the realisable value which will be equal to fair value but in the markets where there is a bearish sentiment and lack of liquidity the fair value is not recoverable

C. Concentration risk-this is the risk that assets are not diversified and investment is concentrated into just one asset class.

D. Credit risk-this is the risk that government entity or company who has issued the bond will not be able to recover with their principal payments because the bond will lose its repayment ability

E. Reinvestment risk- This is the risk which is associated with risk of loss from reinvesting principle or income at a lower rate.

F. Inflation risk-this is the risk due to time value concept of money because there would be a risk of loss in the purchasing power because the value of investment is not always same due to the inflation factor.

G. Horizon risk-this is the risk that investment horizon will be shortened because of unforeseeable event like the loss of your unemployment.

There are various risks which will exist in the the equity market as well as the bond market and this will include-

A. Market risk-this is the risk that investment in share will drop because of drop in the market prices.

B.liquidity risk means the risk that the investment in share will not be realised to their fair value.

C.credit risk will be associated with bonds and the principal payment would not be recoverable.

D. Reinvestment risk the risk of loss from the investment of principal or income at a lower interest rate

E. Inflation risk is the risk related to the loss on the purchasing power and it will erode the value of the investment even if it does not decrease.

there are other risk like risk of foreign investment risk which will also impact the value of investment in bond and equity markets.

These risk will affect the bonds and equity markets because they will be negatively impacting the value of the investment because the presence of these risk can lead to loss in the overall value of investment.