Investment Risk

 Risk is the chance that an investment’s actual return will be different than expected. Risk includes
the possibility of losing some or all the original investment.

Systematic risk arises out of external and uncontrollable factors such as:

1. Market risk arises due to changes in demand and supply, risks perception and expectations of
investors, information flow, and others.
2. Interest rate risk is due to uncertainty of future market values and size of future income caused by
fluctuations in the general level of interest.
3. Purchasing power risk happens when inflation erodes the purchasing power of peso which increases
investor risk.

Non-systematic risk arises from known, internal and controllable factors related to the operation of a
business such as:

1. Business risk relates to strikes, lawsuits, company’s management, marketing strategies, financial
leverage, and others.
2. Financial risk is associated with the capital structure of a firm.
3. Default risk arises due to inability in meeting financial obligations when due for payment.
4. Management risk is the risk faced by the investors affected by the decisions made by the firm’s
management and board of directors.
5. Liquidity risk is associated with the uncertainty and inability to sell quickly for cash the investment on
hand.

Types of Investors
1. Risk-neutral investors are those who are willing to accept equal levels of expected return for higher
levels of risks.
2. Risk-taker investors are those who are willing to accept lower levels of expected returns for higher
level of risks.
3. Risk-averse investors are those who select a portfolio that maximizes expected returns for any given
level risk or minimizes risk for any given level of expected return.