Portfolio Managers • Advisers • Financial Planners

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VARIOUS DEFINITIONS FOR RISK

Risk: the potential that a certain activity (or inaction) will lead to an undesirable outcome.

ISO31000: (International Organization for Standardization) the effect of uncertainty on outcomes.

The Open Group: probability of frequency and probability of magnitude of future loss

Behavioral Finance: Degree of uncertainty associated with the return on an asset

Other kinds of risk:

Downside Risk: Risk of a decline in market price (as opposed to upside & downside risk)

Inflation Risk: Risk of decline in real value (nominal value less inflation)

Default Risk: Risk that the borrower will not make payments as promised

Investment Risk: Risk related to an investment

Commodity Risk / Fuel Price Risk: Risk that cash flows are disrupted by changes in commodity prices

Country Risk/Political Risk: Risk of policy changes, civil disruptions, etc.

Client Risk/Inherent Risk: Risk that client materially misleads auditors/financial statements

Audit Risk = Inherent Risk * Control Risk * Detection Risk

Security Risk / IT Risk: Risk that security or information systems are compromised

Legal Risk: Risk that legislation changes or parties do not have legal right to enter contracts

Settlement Risk / Counter-Party Risk: Risk of default on one’s obligation due to someone else’s default

Interest Rate Risk: Risk that interest rates or implied volatility changes?

Liquidity Risk: Risk that the asset cannot be traded timely

Volatility Risk: Risk that price of a derivative changes due to volatility in the underlying asset

Refinancing Risk / Funding Risk: Risk that future obligations cannot be financed

Operational Risk / Business Risk: Risk that business cash flows are not as expected

Reinvestment Risk: Risk that investment rate may not be renewable

Reputational Risk: Risk that an event damages the reputation of a company

Sampling Risk: Risk that conclusion is based on a sample not representative of the population

Systemic Risk: Risk that investment fails due to macroeconomic or system-wide decline

Non-Systemic Risk: Risk associated with a specific investment (as opposed to systemic risk)

Value At Risk: Amount of an investment that may be lost if investment fails

Profit Risk / Concentration Risk: Risk of an uneven distribution of profit factors or borrowers

Market Risk / Equity Risk: Risk that equity prices fluctuate (standard deviation of price)

© Daniel Dower, 2012

 

 

 

 

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The content of this website is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. Investments and/or investment strategies involve risk including the possible loss of principal. There is no assurance that any investment strategy will achieve its objectives. Investment advisory services are offered through Texas Elite Advisory, LLC, a State of Texas Registered Investment Advisor. For a complete description of investment risks, fees and services, review the Texas Elite Advisory, LLC firm brochure (ADV Part 2A) which is available via the web link on this site.

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