INVESTMEN RISK IS AN EXPOSURE

T RISK
TO DANGER OR A
HAZARD
Types of Risk
 INFLATION RISK
RIsk that the money received on
an investment may be worth
less when adjusted for inflation
Types of Risk
LIQUIDITY RISK
Investor may not be able to sell
his investment when desired, or
has
to sell below expected value, or
has high costs
DEFAULT RISK
Probability that borrowers will
not be able to meet
their commitment on paying
interest and/or principal as
scheduled
RE-INVESTMENT RISK
Probability that income flows
received from an
investment may not be able to
earn the same interest as the
original interest rate
 BUSINESS RISK
This risk is caused by factors
that affect the operations of the
company
Types of Risk
INTEREST RATE RISK
Interest rate risk refers to the
risk that bond prices will fall in
response to rising interest
rates, and rise in response to
declining interest rates.
EXCHANGE RATE RISK
Incurred due to changes in the
exchange rate of domestic
currency
relative to a foreign currency
MARKET RISK
Risk of the loss of value in an
investment because of adverse
price
movements in an asset in the
market
 Measuring Risk

Risk is defined as deviation of actual returns from expected return

1. INFORMATION ON THE FUTURE VALUES OF

RETURN FROM THAT INVESTMENT

2. THE LIKELIHOOD OF OCCURRENCE, OR

PROBABILITY ESTIMATE FOR EACH RETURN
VALUE
 Measuring Standard Deviation &
Variance

Calculate expected return, or the average Calculate deviations of each actual return value
Add up all the squared deviations
return of the series and square it

Divide the square root obtained by the square

Take a square root of the sum of squared This is Standard Deviation. Variance is
root of the number of observations
deviations the square of this value