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RISK

Measurable possibility of losing or not gaining value. Risk is differentiated from uncertainty, which is not measurable. Among the commonly encountered types of risk are:

Actuarial risk: risk an insurance underwriter covers in exchange for premiums, such as the risk of premature death.

Exchange risk: chance of loss on foreign currency exchange.

Inflation risk: chance that the value of assets or of income will be eroded as inflation shrinks the value of a country’s currency.

Interest rate risk: possibility that a fixed-rate debt instrument will decline in value as a result of a rise in interest rates.

Inventory risk: possibility that price changes, obsolescence, or other factors will shrink the value of inventory.

Liquidity risk: possibility that an investor will not be able to buy or sell a commodity or security quickly enough or in sufficient quantities because buying or selling opportunities are limited.

Political risk: possibility of nationalization or other unfavorable government action.

Repayment (credit) risk: chance that a borrower or trade debtor will not repay an obligation as promised.

Risk of principal: chance that invested capital will drop in value.

Systemic Risk: The risk inherent to the entire market or entire market segment. Also known as "un-diversifiable risk" or "market risk."

Interest rates, recession and wars all represent sources of systematic risk because they will affect the entire market and cannot be avoided through diversification. Whereas this type of risk affects a broad range of securities, unsystematic risk affects a very specific group of securities or an individual security. Systematic risk can be mitigated only by being hedged. Even a portfolio of well-diversified assets cannot escape all risk.

Underwriting risk: risk taken by an investment banker that a new issue of securities purchased outright will not be bought by the public and/or that the market price will drop during the offering period.