I.

INTRODUCTION

Everyone is exposed to some type of risk every day—whether it’s from driving,

walking down the street, investing, capital planning, or something else. An investor’s

personality, lifestyle, and age are some of the top factors to consider for individual

investment management and risk purposes. Each investor has a unique risk profile that

determines their willingness and ability to withstand risk. In general, as investment risks

rise, investors expect higher returns to compensate for taking those risks.

A fundamental idea in finance is the relationship between risk and return. The

greater the amount of risk an investor is willing to take, the greater the potential return.

Risks can come in various ways and investors need to be compensated for taking on

additional risk.

II. BODY/DISCUSSION

What Is Risk in Investment and Portfolio Management?

Risk is defined in financial terms as the chance that an outcome or investment's

actual gains will differ from an expected outcome or return. Risk includes the possibility

of losing some or all an original investment.

Quantifiably, risk is usually assessed by considering historical behaviors and

outcomes. In finance, standard deviation is a common metric associated with risk.

Standard deviation provides a measure of the volatility of asset prices in comparison to

their historical averages in each time frame.

the basics of risk and how it is measured. Learning the risks that can apply to different

scenarios and some of the ways to manage them holistically will help all types of

investors and business managers to avoid unnecessary and costly losses.

Understanding Risk

If you want the financial security and sense of accomplishment that comes with

investing successfully, you must be willing to take some risk. In most cases, risk means

the possibility you'll lose some or even all the money you invest.

Taking risk doesn't mean you have to take flying leaps into untested waters — it

means anticipating what the potential problems with a certain investment might be and

putting a strategy in place to manage or offset them.

There is some risk you can avoid. For instance, there's risk in concentrating all of

your savings in just one or two stocks or bonds. There's investment risk in choosing to

put your money into one company rather than another. And there's management risk

that a company's officers may make serious errors. These are examples of what's known

as non-systematic risk because the potential problem lies in the individual investment,

not the investment marketplace.

You can manage non-systematic risk by allocating and diversifying your portfolio

or spreading your assets among a variety of investments. That way, if one of your
investments goes down significantly in value, those losses may be offset to some degree

by gains, or even stable values, in some of your other investments.

Types of Financial Risk

1.Systematic Risk

Systematic risks, also known as market risks, are risks that can affect an entire

economic market overall or a large percentage of the total market. Market risk is the risk

of losing investments due to factors, such as political risk and macroeconomic risk, that

affect the performance of the overall market. Market risk cannot be easily mitigated

through portfolio diversification. Other common types of systematic risk can include

interest rate risk, inflation risk, currency risk, liquidity risk, country risk, and sociopolitical

risk.

There is some risk, called systemic risk, that you can't control. But if you learn to

accept risk as a normal part of investing, you can develop asset allocation and

diversification strategies to help ease the impact of these situations. And knowing how

to tolerate risk and avoid panic selling is part of a smart investment plan.

 Market Risk

This is the possibility that the financial markets will drop in value and

create a ripple effect in your portfolio. For example, if the stock market as a

whole loses value, chances are your stocks or stock funds will decrease in value

as well until the market returns to a period of growth. Market risk exposes you to
 potential loss of principal, since some companies don't survive market downturns.

But the greater threat is the loss of principal that can result from selling when

prices are low.

 Interest Rate Risk

This is the possibility that interest rates will go up. If that happens,

inflation increases, and the value of existing bonds and other fixed-income

investments declines, since they're worth less to investors than newly issued

bonds paying a higher rate. Rising interest rates also usually mean lower stock

prices, since investors put more money into interest-paying investments because

they can get a strong return with less risk.

 Recession Risk

A recession, or period of economic slowdown, means many investments

could lose value and make investing seem riskier.

 Political Risk

With the increasing interaction of the world's markets, political climates

around the world can affect the value of your domestic and international

investments. A period of instability, for example, can drive the value of your

investments down, while political stability and growth can increase their value.

2.Non-Systematic Risk

Unsystematic risk, also known as specific risk or idiosyncratic risk, is a category of

risk that only affects an industry or a particular company. Unsystematic risk is the risk of
losing an investment due to company or industry-specific hazard. Examples include a

change in management, a product recall, a regulatory change that could drive down

company sales, and a new competitor in the marketplace with the potential to take away

market share from a company. Investors often use diversification to manage

unsystematic risk by investing in a variety of assets.

RISK AND DIVERSIFICATION

The most basic—and effective—strategy for minimizing risk is diversification.

Diversification is based heavily on the concepts of correlation and risk. A well-diversified

portfolio will consist of different types of securities from diverse industries that have

varying degrees of risk and correlation with each other’s returns.

While most investment professionals agree that diversification can’t guarantee

against a loss, it is the most important component to helping an investor reach long-

range financial goals, while minimizing risk.

CAN PORTFOLIO DIVERSIFICATION PROTECT AGAINST RISKS?

Portfolio diversification is an effective strategy used to manage unsystematic risks

(risks specific to individual companies or industries); however, it cannot protect against

systematic risks (risks that affect the entire market or a large portion of it). Systematic

risks, such as interest rate risk, inflation risk, and currency risk, cannot be eliminated

through diversification alone. However, investors can still mitigate the impact of these
risks by considering other strategies like hedging, investing in assets that are less

correlated with the systematic risks, or adjusting the investment time horizon.

III. SUMMARY

 Risk takes on many forms but is broadly categorized as the chance an outcome or

investment's actual gain will differ from the expected outcome or return.

 Risk includes the possibility of losing some or all of an investment.

 There are several types of risk and several ways to quantify risk for analytical

assessments.

 Risk can be reduced using diversification and hedging strategies.

We all face risks every day—whether we’re driving to work, surfing a 60-foot

wave, investing, or managing a business. In the financial world, risk refers to the chance

that an investment’s actual return will differ from what is expected—the possibility that

an investment won’t do as well as you’d like, or that you’ll end up losing money.

The most effective way to manage investing risk is through regular risk

assessment and diversification. Although diversification won’t ensure gains or guarantee

against losses, it does provide the potential to improve returns based on your goals and

target level of risk. Finding the right balance between risk and return helps investors and

business managers achieve their financial goals through investments that they can be

most comfortable with.

ONLINE REFERENCES:
 https://www.investopedia.com/terms/r/risk.asphttps://en.wikipedia.org/wiki/

Integer_programming

 https://hbr.org/1979/09/risk-analysis-in-capital-investment

 https://study.com/academy/lesson/portfolio-risk-management-risk-management-

plan.html#:~:text=Portfolio%20risk%20management%20is%20the%20collection

%20and%20analysis%20of%20risks,than%20those%20that%20are%20projected.