Sources of Investment Risk Submitted to: Rutvi Umriger Prepared by: Soyeb Jindani (Roll no: 14)

Introduction On ground of assurance of the return, there are two kinds of Investments - Riskless and Risky. Riskless investments are guaranteed, but since the value of a guarantee is only as good as the guarantor, those backed by the full faith and confidence of a large stable government are the only ones considered "riskless." Even in that case the risk of devaluation of the currency (inflation) is a form of risk appropriately called "inflation risk." Therefore no venture can be said to be by definition "risk free" - merely very close to it where the guarantor is a stable government.

Defining Risk Risk refers to the chance that some unfavorable event will happen Investment risk is the probability that actual returns may deviate from expected returns The chance that actual returns may be lower than expected return gives rise to investment risk Higher the probability of actual returns being less than expected, higher will be investment risk

Return is the motivating force and a reward for undertaking the investment. But the reward does not come as a free launch. The reward is attached with the risk. Numerous factors may contribute to investment uncertainty. The uncertainty makes investment risky. The sources of uncertainty that contribute to investment risk are as follows:

1. Liquidity Risk: Liquidity risk is associated with uncertainty created by the inability to sell the investment quickly for cash. The less the liquidity, the greater will be the risk. 2. Interest Rate Risk: Market interest rate influences the value of an asset and hence its return. For eg. if market interest rate rises, the value of an asset (Bond) will decrease. 3. Default Risk: It is related to the probability that some or all of the initial investment will not be returned. The degree of the risk is closely related to the financial condition of the company issuing the security. 4. Call ability Risk: Some securities are issued with a call provision i.e. company may call back the securities issued before maturity.

5. Convertibility Risk: This risk arise from a convertible bond or preferred stock that reflects the possibility that the investment may be converted into the issuer’s common stock at a time or under terms harmful to the investor’s best interests. 6. Bull-Bear Market Risk: The various market forces make securities price upward and downward. The bull and bear market create a long lasting source of investment risk. 7. Industry Risk: Industry risk is that portion of an investment’s total variability of return caused by events that affect the products and firms that make ups and downs to the industry. 8. Management Risk: All the decision taken by management and Board of Directors materially affect the risk faced by investors.

9. Political Risk: It is the portion of assets’ total variability of return caused by changes in the political environment (domestic and international as well as the internal changes of the company). 10. Purchasing Power Risk: It is the variability of return an investor suffers because of inflation. Inflation erodes the purchasing power of money and increases investment risk.

The first approach links risk to the uncertainties surrounding the stock and the company that issued it. While these uncertainties are varied, they generally stem from six fundamental sources. t h e F O C U S A B r a n d e s P u b l i c a t i o n Reserach by this Publication on Investment risk

1.Business risk: refers to the uncertainty of the firm's income flows and stems from the nature of the company's business. 2.Financial risk: is the uncertainty created by the extent of the firm's indebtedness and its capital structure. 3.Liquidity risk: involves the ease with which the company's stock can be sold on the market,

4.Exchange rate risk: risk applies when the sale also involves a currency conversion. 5.Country risk: is uncertainty regarding the political and economic environment of the company's home country, 6.Global risk: refers to the prospect of international events affecting the livelihood of companies around the world.

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