RISK
Capital
Def
Losing some/all of the amt invested
Notes
Hedge capital risk w/ Tbondsbut then you get purch
power risk. All risks are tradeoff for another.
Products Affected
Corp bonds, but corp stock ↑ risk
Systematic  Affect securities system-wide. Overall, day-to day risk to market. Diversification does not reduce these risks; options can be used as a hedge for market risk
Market; msd by beta
1.5=1.5x more volatile
Risk an investment will lose value due to an overall
market decline. Beta is used to measure market
risk.
Markets panic due to war, weather events, etc
Cannot be mitigated thru diversification. But can hedge
to reduce risk. insurance/banking products to avoid this
risk, options, futures, ETFs
Interest Rate ↑
Risk of int rates ↑, pushing ↓ market price of
bonds, affecting your principal.
Short term/intermediate bond funds are used to reduce
interest rate risk. Bond Ladderspread out the maturity
to mitigate.
Purchasing
Power/Inflation/Dolla
r
Purchasing power will be reduced over time due to
overall increases in prices. Inflation reduces your
buying power
Common stock used to mitigatepay dividends.
Retirees are more susceptible bc they are on a fixed
income. Workers tend to get raises to offset inflation.
Call
Municipal/corp bonds being bought back before
date on issue. Happens when int.rates. ↓
Prepayment/Extensio
n
Reinvestment
Int rates ↓
Mortgages: Int rates ↓ and home owners want to
refinance, so they pay off and get new mortgage.
Int rates ↑ & they extend it.
Risk that int rates will↓, forcing bondholders to
reinvest their int pmts @ lower rates. Opposite of
Interest Rate Risk reinvest. @ varying int rates
Bonds, preferred stocks. Hedge w/ options, futures,
ETFs
Long term bonds**highest risk, longer bond=more
risk. T-bonds, preferred stock(fixed income
security) zero coupon bonds ↑risk than coupon
bonds. common shares of utility companies bc of
dividends..int rates ↑, stock price goes ↓ also highly
leveraged, so their borrowing cost will go up,
reducing the hefty dividend paid.
Fixed income investments. US treasuries have higher
risk bc they are not high yielding. Bonds; hedge w/
TIPS, real estate, precious metals
Bonds. Stated on the bond. Mortgages.
Mortgage backed version of call. Mortgage securities only
have estimated date of maturity. If int rates ↑ might not
pay off mortgage as soon as thought(extension)
Mortgage backed securities. GNMA, FNMA, anything
w. a mortgage
Use bond latter to hedgerolling maturity dates OR zerocoupon bonds (more prone to int rate risk)
Bonds, EXCEPT zero coupon
Political
Risk of investments returns suffering due to
political chgs/instability in country/region
Can be used to hedge against a bad year in US cos.
Any emerging markets. Try to limit exposure. China.
Brazil. Etc.
Currency/Foreign
Exchange
Changes in the value of the USD or the foreign
currency.
US investors are harmed when the USD strengthens vs
the foreign currency where his investment is
Risk to both int’l markets & undeveloped/emerging
markets. ADRs
Unsystematic Only affect certain market sectors/industry/companies. Diversify to protect. Options. Bond portfolios are less volatile than stock portfolios
Business
Risk that the biz we invest in, becomes less profitable for many reasons. Poor mgmt., competition, labor s trike,
obsolete products. How strong is the biz? “New Coke, ford edsel, blackberry”
Competition from other cos, outdated
service/product. Bookstore chain, newspaper co,
Legislative/Regulatory
Changes to tax code or regulations could
negatively affect value of investment.
Regulatory- changes to regulations (EPA on oil)
Mutual funds focusing on 1 industry is riskier bc not
diversified
Legislative-chgs to laws
Eg-client owns tax-exempt muni.bonds & govt
removes tax exemption for interest. Huge selloff
driving prices ↓ green industries, oil/gas, airlines,
pharma
Credit/Default/Financi
al
Risk issuer of a bond will be unable to pay interest
OR return principal….issuer will fail
Govt bonds=zero risk of this(instead have higher inflation
risk). Muni bonds have higher risk & corp bonds too.
Credit downgrade=lower price of bond
Fannie/Freddie Mae NOT Ginnie(FFCof USG). Low
bond prices=high yield
Liquidity/Marketabilit
y
Risk you can’t quickly sell off OR sell @ an
acceptable price bc of lack of buying interest. Few
buyers
Govt sec. more liquid than muni. Listed stocks more
liquid than non listed.
Partnerships, hedge funds, thinly traded stocks all
↑risk of liquidity, real estate
Opportunity Cost
Risk that you might have to pass up an oppo. To
make more resturn. What you sacrifice
Give up a 5% T-bond invest5% = oppo cost