Risk Risk can be classified as either pure risk or speculative risk. Pure risk is defined as the chance that an unwanted and detrimental (harmful) event will take place. Insurance is designed to address pure risk, because pure risk yields only a loss. Because investments have the possibility (or even expectation) of return, pure risk is not the risk that we are concerned with here. In investments, the risk is the second classification of risk – speculative risk. In investing, speculative risk is defined as the variability of actual returns from expected returns, and this variability may be a gain or a loss. Investment risk is analyzed in terms of the probability that the actual return will be different from the expected return, either positively or negatively. It is speculative risk and the management of speculative risk that management must address in all investment decisions. We will look at speculative risk from a number of different perspectives and also look at a number of different types of risks. However, before we start looking at the detailed risks, let us first start by discussing some of the more general risk concepts. As already mentioned, any individual investment that a person or company makes has investment risk. For a company, an investment may be an investment in securities, but an investment for a company is also a new project such as a new machine or a new plant or the purchase of another company that it will own and operate, perhaps as a subsidiary. This investment risk may be analyzed and measured from the standpoint of one single investment, or it may be analyzed by looking together at all of the investments that are held by the person/company. All of an investor’s investments together are called a portfolio. When all of the investments of the company are looked at collectively to determine their collective risk, this collective risk is called portfolio risk. Later we will discuss the different ways in which portfolio risk can be managed.
Posted on: Wed, 24 Dec 2014 10:58:13 +0000
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