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Risk attached to Investments

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Risk- Risk which is common to an entire classof assets or liabilities. The value of investments

may decline over a given time period.

Asset allocation and diversification can protect

against market risk.

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Diversification in finance involves spreading

investments around into many types ofinvestments, including stocks, mutual funds,,

gold, debt instrument, property.

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Types of Systematic andunsystematic risk

Systematic &Unsystematic risk

Risk Risk

SystematicRisk

Interest RateRisk

Inflation /purchase

power risk

UnsystematicRisk

Business RiskFinancial

RiskDefault risk

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Systematic Risk - also known as "undiversifiable risk" or"market risk.

It is the risk which is due to the factors which are beyond

the control of the people working in the market. Interestrates, recession and wars all represent sources of

systematic risk because they affect the entire market and

cannot be avoided through diversification

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Inflation Risk also know as purchase power risk , isthe chance that the cash flows from an investmentwon't be worth as much in the future because ofchanges in purchasing power due to inflation.

Inflation risk , is the chance that the cash flows from aninvestment won't be worth as much in the futurebecause of changes in purchasing power due to

inflation.

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Unsystematic Risk - also known as Diversifiable risk . Thisis the risk other than systematic risk and represents theportion of an assets risk that is associated with randomcauses that can be eliminated through diversification.

Its attributable to firm-specific events, such as strikes,lawsuit, regulatory actions, and loss of a keyaccount. Unsystematic risk is due to factors specific to anindustry or a company like labor unions, product category,

research and development, pricing, marketing strategy etc.

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Business risk is the risk which is associated withcore business activities, for example, Demandcreation, supply, operations, production, rawmaterial procurement etc.

If an organization fails to properly manage these

activities then the probability of impact of thesefailures on revenue becomes too high and thebusiness can loose some part of its sales. Due tolower revenue the profits of business gets negativelyimpacted, particularly in case where Fixed Cost is

very high the magnitude will be very high.

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Financial Risk - , financial risk is associated withthe debt level of the business.

If the company has high level of debt in its capital

structure then it has a liability to pay to lenders.Payment comprises of Interest and principal

repayment. Higher is the debt level higher is risk

of defaulting

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Default Risk - The risk that a debtor will be unable topay back its loans. Default risk goes up if a debtorhas large number of liabilities and poor cash flow.

Generally speaking, companies and persons withhigh default risk stand a greater chance of a loanbeing denied and pay a higher interest rate on the

loans they do receive. See also: Bankruptcy.

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Total Risk = Systematic risk + Unsystematic Risk