Risk

Risk consists of two components Systematic Risk Unsystematic Risk 

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political situations and the sociological changes affect the security mkt. and uncontrollable by the Co. It affects the market as a whole.Systematic Risk     It is caused by factors external to the particular Co. It is unavoidable. The economic conditions. .

2.Systematic Risk  1. 3. It is further divided into: Market Risk Interest Rate Risk Purchasing Power Risk .

it is known as bull market. the index moves from low level to the peak. When the security moves upward haltingly for a significant period of time.Market Risk    It is defined as that portion of total variability of return caused by the alternating forces of bull and bear markets. . In the bull market.

the index declines haltingly from the peak to a market low point called trough for a significant period of time. .. During the bull and bear market more than 80 % of the securities¶ prices rise or fall along with the stock market indices.Market Risk   Bear market is just a reverse to the bull market.

post budget blues and fall in the value of currency.Market Risk   The forces that affect the stock market are tangible and intangible events. political un-certainty. . The tangible events are real events such as earthquake. war.

. But reactions to the tangible events become over reactions and they push the market in a particular direction. The market psychology is affected by the real events.Market Risk    Intangible events are related to market psychology.

Most commonly interest rate risk affects the price of bonds. .Interest Rate Risk    It is the variation in the single period rates of return caused by the fluctuations in the market interest rate. debentures and stocks. The fluctuations in the interest rates are caused by the changes in the government monetary policy and the changes that occur in the interest rates of treasury bills and the government bonds.

. investor would like to switch his investments from pvt. sector bonds to public sector bonds. to tide over the deficit in the budget floats a new bond of a higher rate of int. and quasi-govt. If the govt. there would be a definite shift in the funds from low yielding bonds to high yielding bonds and from stocks to bonds.. If higher rates are offered.Interest Rate Risk    The bonds issued by the govt. are considered are considered to be risk free.

if the stock market is in a depressed condition. to have an assured rate of return.Interest Rate Risk    Likewise. investors would like to shift their money to the bond market. Interest rates not only affect the security traders but also the corporate bodies who carry their business with borrowed funds. . The fall in the demand for securities would lead to a fall in the value of the stock index.

This would lead to a reduction in earnings per share and a consequent fall in the price of share. .  The cost of borrowing would increase and a heavy outflow of profit would take place in the form of interest to the capital borrowed.

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