RISKS

 Risk implies future uncertainty about deviation from

expected earnings or expected outcome. Risk measures the
uncertainty that an investor is willing to take to realize a
gain from an investment.
 Risk can be referred as the chances of having an unexpected
or negative outcome. Any action or activity that leads to loss
of any type can be termed as risk.
 Risk can be defined as the chance that the expected or
prospective advantage, gain, profit or return may not
materialise; that the actual outcome of investment may be
less than the expected outcome.
 RISK RETURN TRADE OFF
The risk-return trade-off helps you to quantify the units of risk you are willing to take for
every unit of return.
 Higher returns entails higher risk but higher risk does not
necessarily mean higher returns.
 For example, you can take a very high risk by putting all your
money in a commodity fund. But if the commodity goes through
a prolonged multi-year bear cycle then your portfolio will grossly
underperform and give negative returns although you have taken
on higher risk.
 Hence you should only take on calibrated and measured risk.

Traditional theory gives way & the Optimal theory comes into
picture.
 Systematic risk, also known as "market risk" or "un-diversifiable risk",
is the uncertainty inherent to the entire market or entire market
segment. Theses risks can affect an entire economic market overall or
a large percentage of the total market
 Market risk is the risk of losing investments due to factors, such
as political risk and macroeconomic risk, that affect the performance of
the overall market.
 Market risk cannot be easily mitigated through portfolio diversification.
 Other common types of systematic risk can include interest rate risk,
inflation risk, currency risk, liquidity risk, country risk, and
sociopolitical risk
 Unsystematic risk, also known as "specific risk," "diversifiable
risk" or "residual risk," is the type of uncertainty that comes with
the company or industry you invest in. Unsystematic risk can be
reduced through diversification.
 For example, news that is specific to a small number of stocks,
such as a sudden strike by the employees of a company you have
shares in, is considered to be unsystematic risk.
 A new competitor in the marketplace with the potential to take
away market share from a company, a change in management, a
product recall, a regulatory change that could drive down
company sales.
 TYPES OF RISKS

 Business Risk: These types of risks are taken by business

enterprises themselves in order to maximize shareholder value
and profits. As for example: Companies undertake high cost risks
in marketing to launch new product in order to gain higher sales.-
UNSYSTEMATIC RISK
 Non- Business Risk: These types of risks are not under the
control of firms. Risks that arise out of political and economic
imbalances can be termed as non-business risk.- SYSTEMATIC
RISK
FINDINGS OF RESEARCH FROM 13 COUNTRIES &
10 INDUSTRIES
GO TO

 https://www.elearnmarkets.com/blog/business-risk-analysis-and-leverage/
 FINANCIAL RISK
 Financial Risk: as the term suggests is the risk that involves
financial loss to firms. When the company is highly leveraged
financial risks come into picture in corporates.
 Financial risk generally arises due to instability and losses in the
financial market caused by movements in stock prices,
currencies, interest rates and more.
 Financial risk is caused due to market movements and market
movements can include host of factors. Based on this, financial
risk can be classified into various types such as Market Risk,
Credit Risk, Liquidity Risk, Operational Risk and Legal Risk.
 TYPES OF RISKS

 Market Risk: This type of risk arises due to movement in prices

of financial instrument. Market risk can be classified as
Directional Risk and Non - Directional Risk. Directional risk is
caused due to movement in stock price, interest rates and more.
Non- Directional risk on the other hand can be volatility risks.
 Credit Risk: This type of risk arises when one fails to fulfil their
obligations towards their counter parties. Credit risk can be
classified into Sovereign Risk and Settlement Risk. Sovereign
risk usually arises due to difficult foreign exchange policies.
Settlement risk on the other hand arises when one party makes
the payment while the other party fails to fulfil the obligations.
 Liquidity Risk: This type of risk arises out of inability to execute
transactions. Liquidity risk can be classified into Asset Liquidity
Risk and Funding Liquidity Risk. Asset Liquidity risk arises
either due to insufficient buyers or insufficient sellers against sell
orders and buy orders respectively.
 Liquidity risk refers to the situation wherein it may not be
possible to dispose off or sell the asset or it may be possible to do
so only at great inconvenience, and cost in terms of time and
money. The greater the uncertainty about time element, price
concession, transaction cost, greater the liquidity risk.
 Default risk arises from the failure on the part of the borrower
or debtors to pay the specified amount of interest and/ or t o repay
the principal, both at the time specified in the debt contract or
indenture.
 Maturity risk arises when the term of maturity of the security
happens to be longer. Long term investment involves risk.
 Operational Risk: This type of risk arises out of operational
failures such as mismanagement or technical failures.
 Legal Risk: This type of financial risk arises out of legal
constraints such as lawsuits. Whenever a company needs to face
financial loses out of legal proceedings, it is legal risk.
 Call risk is associated with corporate bonds which are issued
with a call back provision whereby the issuer has the right to
redeem the bonds before maturity. Reinvesting it would be at a
lower interest.
 Interest rate risk is the variability in return of security due to the
changes in the level of market interest rates or is the loss of
principal of a fixed return security due to increase in the general
level of interest. When interest rise the value or market price of
the security drops and vice versa. The degree of interest rate risk
is directly related to the length of time to maturity of the security

 Inflation risk also known as purchasing power risk, is the risk
that the real return on the security may be less than the nominal
return. In case of fixed income securities, since payment in terms
of rupees are fixed, the value of the payments in real term
declines as the level of commodity prices increases.
 Exchange rate or currency risk refers to cash flow variability
experienced by economic units engaged in international
transactions or international exchange on account of uncertain or
unexpected changes in exchange rates.
 Business risk is the uncertainty of income flows that is called by
the nature of a firm’s business i.e. by doing business in a
particular environment. It has 2 components— Operational risks
and operational efficiency.
READING---CLASS ROOM

 https://www.dnb.com/perspectives/finance-credit-risk/quarterly-global-
business-risk-report.html
 LINKS--- FOR CLASS ROOM
 https://www.youtube.com/watch?v=Fcw1-Olmi_s
 https://www.youtube.com/watch?v=JqfNc_zTiwQ&list=RDCMUC2XO4HDxzfMOZI
V1l795g1Q&index=1
 https://www.youtube.com/watch?v=sbL6z7vS-hg---TO C IN STOCK MARKET

 https://www.youtube.com/watch?v=xXaS3AZSbeQ----CAPITAL MARKET RISK

 https://www.youtube.com/watch?v=BOn4ry5XNtQ---more technical ( last to be shown)