Investment Risks Flashcards
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Terms in this set
- Systematic vs. Nonsystematic Risk Systematic risks (market, interest-rate, inflation) affect the whole market and CANNOT be diversified away; nonsystematic risks (business, credit, regulatory) are issuer- or industry-specific and CAN be reduced through diversification.
- Market Risk The risk that a security's price falls because the overall market declines, regardless of the issuer's own performance — the classic systematic risk.
- Interest-Rate & Reinvestment Risk Interest-rate risk is the chance that rising rates push existing bond prices down — worst for long maturities and low coupons; reinvestment risk is its mirror: falling rates force coupons and called principal to be reinvested at lower yields.
- Credit & Default Risk The risk that an issuer fails to pay interest or principal on time; measured by the rating agencies and priced as extra yield (the credit spread) over Treasuries.
- Inflation (Purchasing-Power) Risk The risk that rising prices erode the real value of an investment's future payments — hardest on long-term fixed payments like bond coupons and fixed annuities.
- Liquidity & Marketability Risk The risk of being unable to sell an investment quickly at a fair price; thinly traded stocks, municipal bonds, non-traded REITs, hedge funds, and DPPs carry the most.
- Currency & Political Risk Risks of investing across borders: exchange-rate moves can erase local-currency gains (currency risk), and unstable governments, expropriation, or capital controls threaten the investment itself (political/country risk).