Risk

RECENT NEWS
Insurance Journal  Jun 15  Comment 
Alan Jay Kaufman, chairman, president and CEO of Detroit/Farmington Hills, Michigan-based H.W. Kaufman Financial Group, has joined the School of Risk Management, Insurance and Actuarial Science board of overseers at the St. John’s University...
MarketWatch  Jun 15  Comment 
The shooting of a Republican congressman and the various responses to it will likely provoke a long overdue backlash against Democratic viciousness toward President Donald Trump, writes Darrell Delamaide.
MedPage Today  Jun 15  Comment 
(MedPage Today) -- Risk factors for heart failure ID'd in women with atrial fibrillation
The Hindu Business Line  Jun 15  Comment 
The Reserve Bank’s recent move to reduce risk weights and standard asset provisioning on individual housing loans are credit negative for the banking sector, says a report. In the second bi-monthly...
MarketWatch  Jun 15  Comment 
Why investing in the stock market does not become safer over time.
The Economic Times  Jun 15  Comment 
Delhi is followed by Bengaluru and Hyderabad. Pune has the lowest job loss risk. Mumbai, Ahmedabad, Chandigarh, Chennai and Kolkata show moderate risk.




 

Risk in economic terms indicates the probability of the occurance of a specific event, which would lead to damage or loss (p.e. the likelihood of losing ship and freight to a hurricane). In distinction to risk, chance indicates the possibility of a positive outcome.

Investments include both risk and chance. This is the so called Risk-Return Tradeoff: low levels of uncertainty offer low potential returns but also low potential losses, whereas high levels of uncertainty offer high potential returns but also high potential losses. Another way many investors quantify and calculate risk is in terms of the standard deviation of returns. This is because all else being equal, risk averse investors prefer returns that are less volatile and more predictable.

Companies try to identify, analyse and control risk through concepts of risk management.

Risks of Bond Investing

Bonds carry credit risk ("will I get my money back?"), prepayment risk, liquidity risk and interest-rate risk.

  • Many bonds give the bond issuer the right to repay the bond early -- which happens more often when rates are low, in other words, just when you don't want your money back. This is prepayment risk.
  • Liquidity risk is the risk that you won't find a good price for your bond when you want to sell it -- because there are so many more bond issuers than stock issuers, and because bonds are not exchange-traded, there may not be a willing buyer.
  • Interest-rate risk is the opposite of prepayment risk: when rates go up, the value of your bond will drop (it drops more, the further away it is from maturity). If your circumstances change and you need to sell the bond before maturity, you can lose capital that you would otherwise receive, if you held the bond to maturity.
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