Fundamentals of Finance_Sommers_Date_041210

Fundamentals of Finance_Sommers_Date_041210 - Risk: 2...

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Risk: 2 categories of risk: 1) Systematic Any company doing business is subject to some risk factors, most of which cannot be removed (ex: inflation, interest rates, weather) 2) Unsystematic Specific to the particular business or industry, they can be solved or mitigated (ex: banks have theft and robbery, gas/electric company could catch on fire) Risk Mitigation – how to reduce potential risk It is mitigated by utilizing resources Ex: if you have class during your favorite show, tape the show or watch it online Technology is a risk mitigation technique Risk Tolerant – willing to accept the risk (tends to be younger investors) Risk Averse – do not want to accept the risk The different types of Unsystematic risk: 1) Business Risk associated with a particular type of business such as banks with a risk of robbery or employee theft… 2) Geographic Risk associated with placing business in areas where they may or may not be successful Ex: a snow shovel manufacturing company located in Miami will incur a lot more costs than one located in Minneapolis 3) Liquidity Risk
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Associated with a company which has either too little corporate liquidity, or incurs substantial additional interest expense to borrow short-term funds to meet ongoing operational costs. Also applied to portfolios having too few liquid funds 4) Management Risk associated with bad management decisions or inappropriate decisions made by senior company officials 5) Reinvestment Rate Risk associated with placing funds in a new investment (can be a project for the company or an investment in the marketplace) which might not return the same as a previous investment or project 6) Technological Risk associated with technological problems in a corporation, either inadequate or outdated systems, or overly-complex, non-user friendly systems which impede productivity The different types of Systematic risk: 7) Currency Risk associated with changes of value between currencies of different countries, which would have an impact on international trade 8) Economic Risk associated with issues related to general economic conditions such as imposed wage/price controls, changes in government policies
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9) Inflation Risk associated with pricing of products, services, raw materials resulting from
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Fundamentals of Finance_Sommers_Date_041210 - Risk: 2...

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