RISK BASICS
What is investment risk?
The possibility that an investment may generate lower-than-expected returns or even cause financial loss.
What is market risk?
The risk of losses caused by overall changes in market prices or general market conditions.
What is systematic risk?
Systematic risk is market-wide risk that affects all firms and cannot be eliminated through diversification.
What is risk avoidance?
Risk avoidance is a strategy of refusing to engage in activities or projects with an unacceptably high level of risk.
A company invests only in one industry. What is the main risk here?
Lack of diversification (high unsystematic risk).
What is the difference between risk and uncertainty?
Risk refers to situations where the probability of outcomes can be estimated, while uncertainty refers to situations where such probabilities cannot be clearly determined.
What is credit risk?
The risk that a borrower or issuer will fail to meet financial obligations on time.
What is unsystematic risk?
Unsystematic risk is firm-specific or industry-specific risk that can be reduced through diversification.
What is risk reduction?
Risk reduction involves taking measures to decrease either the probability of a risk occurring or its negative impact.
An investor holds foreign assets and loses money due to exchange rate changes. What risk occurred?
Currency risk.
Why are all investments exposed to risk?
Because future market conditions, economic changes, and investment outcomes cannot be predicted with complete accuracy.
What is liquidity risk?
The risk that an asset cannot be sold quickly at its fair market value.
Which type of risk cannot be reduced by diversification?
Systematic risk cannot be reduced by diversification.
What is risk localization?
Risk localization means identifying the riskiest part of a project and limiting its impact to a specific area or unit.
A company cannot sell its property quickly without reducing the price. What risk is this?
Liquidity risk.
What is the most important financial danger faced by an investor?
The possibility of losing part or all of the invested capital.
What is interest rate risk?
The risk that changes in interest rates will negatively affect the value of an investment, especially fixed-income securities.
What is diversification?
Diversification is the practice of spreading investments across different assets in order to reduce overall risk.
When is risk acceptance applied?
Risk acceptance is applied when the potential loss is considered manageable or when the cost of reducing the risk is too high.
A bank suffers losses because a borrower fails to repay a loan. What type of risk is this?
Credit risk.
Why is investment risk considered unavoidable even with full information?
Because future market conditions and external factors cannot be predicted with certainty, even when all current information is available.
A company’s bond loses value after interest rates rise sharply. What type of risk is this?
Interest rate risk.
A global economic crisis reduces the value of almost all stocks. Which type of risk is this and why?
Systematic risk, because it affects the entire market and cannot be avoided through diversification.
A firm decides not to invest in a highly innovative but unstable project due to uncertainty. Which strategy is applied?
Risk avoidance.
An investor has many different investments, but still loses money during a global crisis.
What type of risk is this?
Systematic risk.