Risk

INTRODUCTION
DEFINATION OF RISK
Risk is a measure of the uncertainty surrounding the return that an investment

will earn or, more formally, the variability of returns associated with a given
asset.
TYPPES OF RISK
In financial management, risk relates to any material loss attached to the

project that may affect the productivity, tenure, legal issues, etc, of the project.
In Finance, different types of risk can be classified under two main groups,
 Systematic Risk.
 Unsystematic Risk.
Systematic Risk refers to the chance an entire market or economy will

experience a downturn or even fail. Economic crashes, recessions, wars,
interest rates and natural disasters are common sources of systematic
risk.
Unsystematic risk describes the chance a specific company or line of

business will experience a downturn or even fail. Unlike systematic risk,
unsystematic risk can vary greatly from business to business. Sources of
unsystematic risk include the strategic, management and investment
decisions a small business owner faces every day.
- Systematic risk is uncontrollable by an organization and Macro in nature.

- Unsystematic risk is controllable by an organization and Micro in nature.
Systematic Risk
Systematic risk is due to the influence of external factors on an organization.

Such factors are normally uncontrollable from an organization's point of view.
It is a macro in nature as it affects a large number of organizations operating

under a similar stream or same domain. It cannot be planned by the
organization.
The types of Systematic Risk are depicted and listed below:
 Interest rate Risk

 Market Risk
 Inflationary Risk
 Interest-rate risk arises due to variability in the interest rates from time
to time. It particularly affects debt securities as they carry the fixed rate
of interest.
The types of interest-rate risk are depicted and listed below.
- Price Risk and

- Reinvestment Rate Risk
The meaning of Price and Reinvestment rate Risk is as follows:
- Price Risk arises due to the possibility that the price of the shares,
commodity, investment, etc. may decline or fall in the future.
- Reinvestment Rate Risk results from fact that the interest or dividend
earned from an investment can't be reinvested with the same rate of
return as it was acquiring earlier.
 Market Risk
Market risk is associated with consistent fluctuations seen in the trading price
of any particular shares or securities. That is, it arises due to rise or fall in the
trading price of listed shares or securities in the stock market.
The types of Market Risk are depicted and listed below.
- Absolute Risk
- Relative Risk
- Directional Risk
- Non-Directional Risk
- Basic Risk
- Volatility Risk
The meaning of different types of Market Risk is as follows:
- Absolute Risk is without any content for e.g., if a coin is tossed, there is
fifty percentage chance of getting a head and vice-versa.
- Relative Risk is the assessment or evaluation of risk at different levels of

business functions. For e.g., a relative-risk from a foreign exchange
fluctuation may be higher if the maximum sales accounted by an
organization are of export sales.
- Directional Risks are those risks where the loss arises from an exposure
to the particular assets of a market. For e.g. an investor holding some
shares experience a loss when the market price of those shares falls
down.
- Non-Directional Risk arises where the method of trading is not

consistently followed by the trader. For e.g. the dealer will buy and sell
the share simultaneously to mitigate the risk
- Basis Risk is due to the possibility of loss arising from imperfectly

matched risks. For e.g. the risks which are in offsetting positions in two
related but non-identical markets.
- Volatility Risk is of a change in the price of securities as a result of

changes in the volatility of a risk-factor. For e.g. it applies to the
portfolios of derivative instruments, where the volatility of its underlying
is a major influence of prices.
 Purchasing power or Inflationary Risk
Purchasing power Risk is also known as Inflation Risk. It is so, since it

emanates (originates) from the fact that it affects a purchasing power
adversely. It is not desirable to invest in securities during an inflationary period.
The types of power or inflationary risk are depicted and listed below.
- Demand inflation Risk
- Cost Inflation Risk
Demand Inflation Risk arises due to increase in price, which result from an
excess of demand over supply. It occurs when supply fails to cope with the
demand and hence cannot expand anymore. In other words, demand inflation
occurs when production factors are under maximum utilization,
Cost Inflation Risk arises due to sustained increase in the prices of goods and
services. It is actually caused by higher production cost. A high cost of
production inflates the final price of finished goods consumed by people.
Unsystematic Risk
Unsystematic Risk is due to the influence of internal factors prevailing within

an organization. Such factors are normally controllable from an organization's
point of view.
It is a micro in nature as it affects only a particular organization. It can be

planned, so that necessary actions can be taken by the organization to mitigate
(reduce the effect of) the risk.
The types of unsystematic Risk are depicted and listed below.
 Business or Liquidity Risk

 Financial Risk or Credit Risk
 Operational Risk
The meaning of different types of Unsystematic Risk is as follows:
 Business or liquidity Risk
Business Risk is also known as Liquidity Risk. It is so, since it emanates

(originates) from the sale and purchase of securities affected by business
cycles, technological changes, etc.
The types of Business or Liquidity Risk are depicted and listed below.
- Asset Liquidity Risk

- Funding Liquidity Risk
- Asset liquidity Risk is due to losses arising from an inability to sell or

pledge assets at, or near, their carrying value when needed. For e.g.
assets sold at a lesser value than their book value.
- Funding Liquidity Risk exists for not having an access to the sufficient-
funds to make a payment on time. For e.g. when commitments made to
customers are not fulfilled as discussed in the SLA (service
level agreements).
 Financial or Credit Risk
Financial Risk is also known as Credit Risk. It arises due to change in the capital
structure of the organization. The capital structure mainly comprises of three
ways by which funds are sourced for the projects.
These are as follows:
o Owned funds. For e.g. share capital.
o Borrowed funds. For e.g. loan funds.
o Retained earnings. For e.g. reserve and surplus.

The types of Financial or Credit Risk are depicted and listed below.
- Exchange rate risk

- Recovery rate risk
- Sovereign risk
- Settlement risk
The meaning of types of Financial or Credit Risk is as follows:
- Exchange Rate Risk is also called as exposure rate risk. It is a form of

financial risk that arises from a potential change seen in the exchange
rate of one country's currency in relation to another country's currency
and vice-versa. For e.g. investors or businesses face it either when they
have assets or operations across national borders, or if they have loans
or borrowings in a foreign currency.
- Recovery Rate Risk is an often neglected aspect of a credit-risk analysis.

The recovery rate is normally needed to be evaluated. For e.g. the
expected recovery rate of the funds tendered (given) as a loan to the
customers by banks, non-banking financial companies (NBFC), etc.
- Sovereign Risk is associated with the government. Here, a government is

unable to meet its loan obligations, reneging (to break a promise) on
loans it guarantees, etc.
- Settlement Risk exists when counterparty does not deliver a security or

its value in cash as per the agreement of trade or business.
 Operational Risk
Operational Risks are the business process risks failing due to human errors.
This risk will change from industry to industry. It occurs due to breakdowns in
the internal procedures, people, policies and systems.
The types of Operational Risk are depicted and listed below.
- Model Risk
- People Risk
- Legal Risk
- Political Risk
The meaning of types of Operational Risk is as follows:
- Model Risk is involved in using various models to value financial

securities. It is due to probability of loss resulting from the weaknesses in
the financial-model used in assessing and managing a risk.
- People Risk arises when people do not follow the organization's

procedures, practices and/or rules. That is, they deviate from their
expected behaviour.
- Legal Risk arises when parties are not lawfully competent to enter an
agreement among themselves. Furthermore, this relates to the
regulatory-risk, where a transaction could conflict with a government
policy or particular legislation (law) might be amended in the future with
retrospective effect.
- Political Risk occurs due to changes in government policies. Such

changes may have an unfavourable impact on an investor. It is especially
prevalent in the third-world countries.
 Basic Difference Between Systematic Risk and Unsystematic Risk
CONCULSION
By understanding various types of Risks in Investment Analysis and

Portfolio management is crucial for achieving financial goals. By
identifying and assessing risks such as market risk, credit risk, liquidity
risk, and operational risk, investors can make informed decisions and
construct well-diversified portfolios. Employing risk management
strategies like diversification, hedging, and asset allocation can help
mitigate these risks and enhance overall portfolio performance and
resilience in changing market conditions.
BIBLIOGRAPHY
1. ZERODHA VARSITY
2. TEACHERS
3. INTERNET
4. https://www.moneycontrol.com
5. https://en. wikipidia.com
6. https://business.dictionary.com

Risk

Uploaded by

Copyright:

Available Formats

Risk

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Risk

Uploaded by

Copyright:

Available Formats

INTRODUCTION

Risk is a measure of the uncertainty surrounding the return that an investment

In financial management, risk relates to any material loss attached to the

Systematic Risk refers to the chance an entire market or economy will

Unsystematic risk describes the chance a specific company or line of

- Systematic risk is uncontrollable by an organization and Macro in nature.

Systematic risk is due to the influence of external factors on an organization.

It is a macro in nature as it affects a large number of organizations operating

The types of Systematic Risk are depicted and listed below:

 Interest rate Risk

The types of interest-rate risk are depicted and listed below.

- Price Risk and

The types of Market Risk are depicted and listed below.

- Relative Risk is the assessment or evaluation of risk at different levels of

- Non-Directional Risk arises where the method of trading is not

- Basis Risk is due to the possibility of loss arising from imperfectly

- Volatility Risk is of a change in the price of securities as a result of

Purchasing power Risk is also known as Inflation Risk. It is so, since it

- Demand inflation Risk

- Cost Inflation Risk

Unsystematic Risk is due to the influence of internal factors prevailing within

It is a micro in nature as it affects only a particular organization. It can be

The types of unsystematic Risk are depicted and listed below.

 Business or Liquidity Risk

The meaning of different types of Unsystematic Risk is as follows:

 Business or liquidity Risk

Business Risk is also known as Liquidity Risk. It is so, since it emanates

- Asset Liquidity Risk

- Asset liquidity Risk is due to losses arising from an inability to sell or

 Financial or Credit Risk

These are as follows:

o Owned funds. For e.g. share capital.

o Borrowed funds. For e.g. loan funds.

o Retained earnings. For e.g. reserve and surplus.

- Exchange rate risk

The meaning of types of Financial or Credit Risk is as follows:

- Exchange Rate Risk is also called as exposure rate risk. It is a form of

- Recovery Rate Risk is an often neglected aspect of a credit-risk analysis.

- Sovereign Risk is associated with the government. Here, a government is

- Settlement Risk exists when counterparty does not deliver a security or

The types of Operational Risk are depicted and listed below.

The meaning of types of Operational Risk is as follows:

- Model Risk is involved in using various models to value financial

- People Risk arises when people do not follow the organization's

- Political Risk occurs due to changes in government policies. Such

By understanding various types of Risks in Investment Analysis and

You might also like