The chances that a real return on an investment will be lesser than the predictable return is known as Risk.
Types of Risk
The risk has been classified into Systematic Risk and Unsystematic Risk;
The systematic risk arises because of the economy of the country and it is universal for all the firms.
The unsystematic risk is the company specific risk and it is limited to the only that firm and it is not universal for all the firms.
Components of a Risk Premium
Risk is the variability of the returns of an investment. The risk of the investment arises due to various factors and the risk associated with these factors is named by that factor.
Financial risk of an investment arises from the capital structure of the firm. If a firm is totally financed with equity, financial risk will be minimum on the other hand when the firm is finance with debt and equity financial risk arises.
This risk is present because of the nature of the business. The businesses having trading nature then there will be high business risk and risk would be high. Capital intensive businesses having low business risk.
The power of the investment to be readily converted into liquid. Whenever an investor invests in financial security care should be taken that the investment can be readily liquidated.
Exchange Rate Risk
The exchange rate risk can be arises because of the difference the currency rate of the different countries trading or doing business together.
This risk is also called Sovereign risk that arises because of the economic condition of the country. If the economic condition of the country is very bad then there will be high country risk for investors and if the economic condition of the country is good then this risk will be low and many investor will invest their money in that country.
November 22, 2018