Types of Risks - Investment Decisions, Business Economics & Finance Video Lecture | Business Economics & Finance - B Com

in the simplest of terms the investment
risk is a possibility of an investment
bringing a result other than anticipated
you may lose some or all of your
invested funds even though you
anticipated profit you can also gain
something but less than you have
expected for example you could have
expected a return on an investment of 5%
but only got 2% it is important to
realize that every investment entails
some risk and to understand the
underlying reasons we will discuss this
further using an example of Irenaeus the
most unlucky investor in the world who
is also lousy when it comes to risk
assessment the inflation risk or the
purchasing power risk let us use an
example from the book fundamental
analysis by John C Ritchie according to
the example we will assume that on
January 1st 1967 Irenaeus deposited
$1000 into a savings account and
expected to maintain or even gain his
purchasing power the annual capitalized
interest rate was 5%
Irenaeus kept his money in his bank
account until the end of 1985 so we can
calculate that at the end of 1985 he had
2,500 $26.95 in his account
should he be happy with this result at
the same time the value of the dollar
fell to 31 cents as compared to 1967
when the account was opened
thus in 1985 the purchasing power of the
original amount 2526 dollars was now
only $783 in 35 cents in terms of
dollars from 1967
Irenaeus underestimated the impact of
inflation he did not expect that
inflation would be so high so he had
lost some of his purchasing power ie 216
dollars and 65 cents from 1967 instead
of maintaining or gaining it
interest rate risk Irenaeus decided to
spend $1,000 to buy bonds that would pay
4% annually in interest his colleague
Arcadius made the right decision to
delay his purchase of the bonds because
a few months later new bonds paid 6% an
interest eg due to the rising inflation
Arcadia's spent $1000 and receives $60
an interest each year well Irenaeus
received only $40.00 per year if
Irenaeus wanted to sell his bonds on the
market he would not be able to sell them
for $1000 anymore
why would anyone buy bonds from him and
be paid nearly 4% an interest when bonds
bought directly from the issuer would
pay 6% in interest so to sell his bonds
Irenaeus had to lower their price to pay
the equivalent or more of the return
rate on the new bonds in this case he
would have to lower the price of his
bonds to $650 for example any buyer
would receive $40 a year
for a one-time price of $650 so that the
interest rate on the old bonds would
effectively rise to six point one five
percent unfortunately here and eius
would lose $350 on sale of course he
could abstain from selling his bonds and
wait until the redemption but in that
case he would earn 4% in interest
instead of 6% political risk
Irenaeus discouraged slightly from his
previous failures decided to invest in
foreign real estate he bought a
beautiful seaside property which he
intended to sell at a profit roughly at
the same time a socialist dictator came
to power in the country
pretty soon the property was
nationalized and put into use by other
people
Irenaeus lost all the funds he invested
in the property of course
Irenaeus was extremely unlucky political
risk does not always involve such
extremes as war or totalitarian
dictatorship political risk may be
associated with any political activities
that have a negative impact on the
economy and on the profitable
of investments such as economic
regulations that negatively impact the
economy or instability of law causing
increased uncertainty currency risk what
year and I slacked in good fortune he
made a foreign perseverance and try not
to ask where he got the money for all of
these endeavors we simply do not know
Irenaeus had some polish SWA days so he
exchanged them for dollars and started
buying shares of some American companies
after a year the prices of shares bought
by Irenaeus expressed in dollars
increased by 10%
Irenaeus thought that his investment was
a great success
so he sold his shares exchanged dollars
for his watches and to his astonishment
discovered that after the exchange he
had less watches in his pocket than he
had last year
it happened because Irenaeus did not
take into account exchange rate
volatility here and is bought $250 with
1000 swati's at the same time $1 costs
for swati's after Irenaeus sold dollars
for shares the value of the shares
increased to $275 that is by 10 percent
then he sold his shares for dollars and
he finally bought swati's with dollars
at the exchange rate of 3.5 swati's for
$1 because the swati strengthened
against the dollar in the meantime at
this exchange rate here Anaya sold 275
dollars and got 960 2.5 swati's fear and
isis luck would have turned around and
he would have gained money had the
dollar strengthened against the swathi
instead liquidity risk but our hero had
yet another idea he wanted to invest in
artwork here and is bought a painting
hoping for its value to grow with time
he was not mistaken its value was
actually steadily growing unfortunately
at some point
Irenaeus urgently needed large amounts
of cash he decided to sell the painting
but he struggled to find any buyer
although his painting was worth much
more than he needed at the moment here
and I has failed to sell it quickly
enough so in the meantime
he had to get a high interest loan the
liquidity risk particularly applies to
real estate on popular shares of
companies and others as well low
liquidity assets are difficult to sell
and if you want to sell them quickly
you have to significantly lower your
asking price its credit risk
irin Isis next investment slip was that
he let himself be deceived by the high
interest rate on corporate bonds he
focused so much on the interest that he
failed to investigate why the issuing
company needed the money it turned out
that the company wanted to finance a
very risky investment that eventually
failed the company got into financial
trouble and defaulted on its obligations
to Irenaeus it's the list of potential
threats that await Irenaeus in the
financial market goes on he also has to
watch out for business risk for example
he can invest in a company that will
make bad business decisions fail to
adapt quickly enough to changes or have
its reputation destroyed for some reason
if Irenaeus wants to buy financial
instruments at the right moment then he
should also pay constant attention to
the general market situation that is not
all many of these risks may occur at the
same time and so Irenaeus should think
well before investing in anything he
should carefully consider each
investment in terms of risk and decide
whether he is willing to take it for
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