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Name and briefly define all of the risk premiums considered when analyzing a investment.

Name and briefly define all of the risk premiums considered when analyzing a investment.

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Expert Solution

The risk premiums considered when analyzing a investment are :

  • Business risk - The risk that the firm's operations do not generate sufficient cash flows. This could be due to business environment, efficieny of operations, or other operating reasons
  • Financial risk - The risk associated with a firm's debt obligations. Higher the debt, higher the financial risk because the firm's cash flows will be used up to service debt.
  • Liquidity risk - The risk that the investment cannot be sold quickly without a significant loss in value from its market price. This arises due to low volumes of transactions in the investment.
  • Foreign exchange risk - The risk of unfavorable movements in exchange rates negatively affecting the returns of the investment in domestic currency
  • Country risk - The risk of the politcal enviroment in the foreign country in which the investment is made
  • Inflation risk - The risk that inflation lowers the real returns of the investment
  • Interest rate risk - The risk that changes in interest rates cause unexpected changes in the value of the investment

jeff jeffy answered 1 year ago
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