About This Chapter
Investment Risks - Chapter Summary
In business, it's important to be able to recognize investment risks. This chapter offers a handful of engaging and informative lessons that discuss different kinds of investment risks. Progress through the chapter to study the applications of reducing risks by understanding the different types that could be tied a potential investment. To make sure you understand these concepts, we've included lesson quizzes and a chapter exam. You can revisit the lessons as many times as needed, and the Ask the Expert feature lets you submit any questions you may have about these investment risk topics. The chapter is also available to study any time that fits your schedule. When you're finished with the chapter's resources, you should be able to:
- Analyze financial instruments used to calculate risk
- Define different types of investment risks including bond risk, credit risk, and interest rate risk
- Manage investments in a manner to reduce loss
- Apply modern portfolio theory to potential investments
1. Financial Instruments & Managing Risk: Definition & Analysis
In this lesson, we'll define financial instruments. Then you'll learn about various types of risks: individual, portfolio, credit and loan concentration. Afterwards, we'll provide examples of financial instruments and how they assist in minimizing risk.
2. Speculative Risk: Definition & Examples
This lesson will provide an overview of speculative risk. This overview will provide the definition and several examples of speculative risk from an investor's point of view.
3. Investment Risks: Definition & Types
This lesson highlights the definition of investment risk and the differences between the various types of investment risks investors face in the marketplace.
4. Bond Risk: Definition & Types
In this lesson, you'll learn the definition of bond risk and explore the different types of bond risk. These include credit/default risk, interest rate risk, inflation rate risk, reinvestment risk, and liquidity risk.
5. Credit Risk Management Methods
In this lesson, we'll define bonds. You'll learn about the characteristics of bonds and their rating system. We'll also explore two risk related concepts: risk-neutral and real-world.
6. Interest Rate Risk: Definition, Formula & Models
Interest rate risk is really the risk of two different events (price reduction and reinvestment rate reduction) caused by a change in interest rates. Interest rate risk affects bond investments, but the good news for bond investors is that it can be mitigated or eliminated.
7. Liquidity Risks: Definition & Examples
This lesson defines the two main types of liquidity risk: 1) trading liquidity risk and 2) funding liquidity risk. You'll learn to identify conditions that may lead a person or bank being unable to meet its short-term financial obligations.
8. How to Reduce Investment Risks
Stock market investments come with both the hope of profitable returns and the risk of significant losses. In this lesson, we'll discuss how you can manage your risk and optimize your exposure to stock market volatility.
9. Individual vs. Portfolio Loan Risk
In this lesson, we'll define loans and investments. You'll learn about four different types of risks that jeopardize a financial institution's profits. Additionally, we'll discuss migration analysis, a loss mitigation tool.
10. Modern Portfolio Theory: Definition & Examples
In this lesson, we will go over the foundations of modern portfolio theory. We will also look at how investors can use it to create an appropriate investment mix that optimizes risk.
11. Hedging in Finance: Definition & Example
When individuals and institutions have investments in the stock market, they are exposed to the risk of financial losses. In this lesson, we'll learn about a way to protect against some losses, known in the financial industry as hedging.
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