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RISK
Risk in holding securities is generally associated with possibility that
realized returns will be less than the expected returns.
OR
Risk can be defined as the probability that the expected return from the
security will not materialize.
Every investment involves uncertainties that make future investment
returns risk-prone. Risk could be categorized depending on whether it
affects the market as whole, or just a particular industry.
Types of Investment Risk
Systematic Risk
Unsystematic Risk
Risk is the potential for variability in returns. Total variability in returns of
a security represents the total risk of that security.
Total Risk = Systematic Risk + Unsystematic Risk
Systematic Risk
Systematic risk refers to that portion of total variability in return caused
by factors affecting the prices of all securities. Economic, political, and
social changes are sources of systematic risk.
Nearly all stocks listed on the National Stock Exchange (NSE) move in
the same direction as the NSE Index. On an average, 50 percent of the
variation in a stocks price can be explained by variation in the market
index. In other words, about half of the total risk on an average common
stock is systematic risk.
Systematic Risk is further subdivided into:
Market Risk, (variation in returns caused by the volatility of stock market)
Interest Rate Risk (Variation in bond prices due to change in interest rate)
Purchasing Power Risk (Inflation results in lowering of the purchasing power of money)
(Demand pull inflation and cost push inflation)
Unsystematic Risk
Unsystematic risk is the portion of total risks that is unique to a firm or
industry. Factors such as management capability, consumer preferences,
raw material scarcity and labour strikes cause unsystematic variability of
returns in a firm. Unsystematic factors are largely independent of factors
affecting securities markets in general.
Unsystematic Risk is further subdivided into:
(Operating Environment, and Financing Pattern)
ii)
iii
iv)
v)
In addition to the aforesaid factors, there are also various others such
as the economic, industry and firm specific factors that affect the risk
an investment.
Risk-Return Relationship
Return
Low risk
Average risk
High risk
C1
AMITY GLOBAL
BUSINESS SCHOOL
Chandig
arh
1 9
1 9
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