Risk

RECENT NEWS
Channel News Asia  5 hrs ago  Comment 
DBS, OCBC and UOB have healthy loss-absorption buffers, which will help them weather a significant rise in credit costs, said the Fitch ratings agency.
guardian.co.uk  9 hrs ago  Comment 
Focusing political leaders on the water crisis will help make 2015 a badly needed watershed year for the world So far, the big news this year has been all about oil. And for good reason: the recent drop in petrol prices has caused widespread...
Benzinga  Jan 29  Comment 
Alibaba Group Holding Ltd (NYSE: BABA) was downgraded at Stifel Research from Buy to Hold on Thursday. According to a Barron's Asia blog, the research firm cited “regulatory risk and the weaker-than-expected monetization rates” as two of the...
Forbes  Jan 29  Comment 
New research out today finds huge gaps between public opinion and scientific consensus on a variety of topics from climate change and evolution to the safety of genetically modified foods and animal research.
MedPage Today  Jan 29  Comment 
(MedPage Today) -- Having a stressful job may be an independent risk factor for stroke.
Forbes  Jan 29  Comment 
The thing about taking a risk is sometimes you get it wrong. But if you don?t take the risk, you?re unlikely to ever get it very right.
The Economist  Jan 29  Comment 
OUR blog post on "Am I Going Down", an app that purports to reveal the odds of crashing on a flight, suggested that the developers had got their calculations confused. For those interested, here is a more detailed explanation of why. It is...
New York Times  Jan 29  Comment 
Thursday: the epistemology of weather, possible snow tonight, and a federal judge rules in favor of emojis.




 

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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