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Market risk

- Systematic risk - Measured by a security's beta - Cannot be diversified away

Country risk

- Systematic risk - Risk that a country's economic, political, or social conditions will negatively impact investments and business operations within that country.

Interest rate risk

- Systematic risk - Risk that changes in interest rates will negatively impact value of an investment. - Interest rates rise, value of security falls, vice versa

Inflation risk

- Systematic risk - The risk that inflation will outpace the returns on an investment, reducing the real value of the returns over time.

Political Risk

- Systematic risk - the potential for a company's investments, operations, or financial performance to be adversely affected by political events or instability.

Sovereign risk

- Systematic risk - the risk that a government may default on its debt obligations or otherwise fail to meet its financial commitments, potentially leading to financial losses for investors and creditors.

Currency risk

- Systematic risk - the risk that changes in exchange rates will negatively impact the value of investments or transactions denominated in foreign currencies.

Reinvestment Risk

- Systematic risk assessment - A variation of interest rate risk - The risk that future cash flows from an investment will need to be reinvested at a lower rate than the original investment's rate. - This risk is particularly relevant for fixed-income securities like bonds and certain types of savings accounts.

Liquidity risk

- Unsystematic risk - the risk that an entity will not be able to meet its short-term financial obligations due to an inability to quickly convert assets into cash without significantly affecting their value.

Legislative Risk

- Unsystematic risk - the risk that changes in legislation—new laws or amendments to existing laws—will negatively impact a company's operations, financial performance, or strategic plans.

Regulatory Risk

- Unsystematic risk - The risk that changes in laws, regulations, or government policies will negatively impact a company's operations, financial performance, or market position. This risk is particularly relevant for businesses that are heavily regulated or operate in multiple jurisdictions with varying regulatory requirements.

Financial Risk

- Unsystematic risk - the potential for a company or investor to experience losses due to its financial structure or practices. This risk is primarily concerned with how a company manages its financial obligations and leverage.

Business risk

- Unsystematic risk assessment - the potential for a company to experience losses or fail to achieve its expected financial performance due to factors inherent to its business operations or environment.

A corporations common stock and preferred stock is forced to seek protection from creditors. Who is most likely to received the largest portion of their investment in the company's securities back? Holders of bonds collateralized by a mortgage on the company's real property holders of the largest block of stock in the company senior management for the company the bankruptcy lawyers

Answer: A - Seeking protection is the same as filing for bankruptcy. - Lawyers will get their money but they aren't investors. - Holders of secured debt such as mortgage bond are in a senior position and will receive a return of majority or all of their investment.

Which of the following securities is considered most senior common stock senior lien prior preferred stock subordinated debenture treasury stock

Answer: C Equities are always junior to debt

All of the following risks are considered diversifiable except: default risk liquidity risk purchasing power risk sovereign risk

Answer: C Purchasing power risk, aka inflation risk is systematic.

If a sovereign gov enacted legislation that prohibited the sale of a product, companies who manufacture that product would likely see the price of their stock dip. This is an example of: business risk credit risk legislative risk sovereign risk

Answer: C Sovereign risk is when a gov falters on its obligations.

Of the many types of risk faced by investors in securities, the systematic risk that first comes to mind for most is: Inflation interest rate market purchasing power

Answer: C They are all systematic but market risk stands out the most in the minds of investors.

Total Unsystematic risks

Business Financial Legislative Liquidity Political Regulatory

When an investor is faced with several choices each with different levels of risk, the decision as to which to purchase opens the investor to: behavioral modification call risk decision risk opportunity cost

Opportunity cost

Total Systematic risks P.R.I.M.E.

Purchasing power (inflation) Reinvestment Interest rate Market Exchange rate (currency)

2 types of risk

Systematic: Market risk or undiversifiable risk, effects the entire market. Unsystematic: Specific risk, effects a particular company or industry.

Liquidity Priority

The order in which a company or investor prioritizes the liquidity of assets or investments to ensure they can meet their financial obligations and operational needs.

Opportunity cost

The value of the next best alternative that is foregone when a choice is made. It represents the benefits or value that could have been gained from an alternative decision or investment, which is sacrificed when one option is selected over another.