Portfolio Management.docx - chapter-01 what is risk Financial Risk is one of the major concerns of every business across fields and geographies This is

Portfolio Management.docx - chapter-01 what is risk...

This preview shows page 1 - 3 out of 9 pages.

chapter-01 what is risk? Financial Risk is one of the major concerns of every business across fields and geographies. This is the reason behind Financial Risk Manager FRM Exam gaining huge recognition among financial experts across the globe. FRM is the top most credential offered to risk management professionals worldwide. Financial Risk again is the base concept of FRM Level 1 exam. Before understanding the techniques to control risk and perform risk management, it is very important to realize what risk is and what the types of risks are. Risk and Types of Risks: Risk can be referred as the chances of having an unexpected or negative outcome. Any action or activity that leads to loss of any type can be termed as risk. There are different types of risks that a firm might face and needs to overcome. Widely, risks can be classified into three types: Business Risk , Non-Business Risk and Financial Risk. 1. Business Risk: These types of risks are taken by business enterprises themselves in order to maximize shareholder value and profits. As for example: Companies undertake high cost risks in marketing to launch new product in order to gain higher sales. 2. Non- Business Risk: These types of risks are not under the control of firms. Risks that arise out of political and economic imbalances can be termed as non-business risk. 3. Financial Risk: Financial Risk as the term suggests is the risk that involves financial loss to firms. Financial risk generally arises due to instability and losses in the financial market caused by movements in stock prices, currencies, interest rates and more. Systematic Risk Systematic risk is due to the influence of external factors on an organization. Such factors are normally uncontrollable from an organization's point of view. It is a macro in nature as it affects a large number of organizations operating under a similar stream or same domain. It cannot be planned by the organization. The types of systematic risk are depicted and listed below. 1. Interest rate risk, 2. Market risk and 3. Purchasing power or inflationary risk.
Image of page 1
1. Interest rate risk Interest-rate risk arises due to variability in the interest rates from time to time. It particularly affects debt securities as they carry the fixed rate of interest. The types of interest-rate risk are depicted and listed below. 1. Price risk and 2. Reinvestment rate risk. The meaning of price and reinvestment rate risk is as follows: 1. Price risk arises due to the possibility that the price of the shares, commodity, investment, etc. may decline or fall in the future. 2. Reinvestment rate risk results from fact that the interest or dividend earned from an investment can't be reinvested with the same rate of return as it was acquiring earlier.
Image of page 2
Image of page 3

You've reached the end of your free preview.

Want to read all 9 pages?

  • Fall '19

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors