Risk involves exposure to some type of danger and the possibility of loss or injury.
In finance and investing, risk often refers to the chance an outcome or investment’s actual gains will differ from an expected outcome or return. Risk includes the possibility of losing some or all of an original investment.
Standard deviation is a common metric associated with risk.
Standard deviation provides a measure of the volatility of a value in comparison to its historical average.
Risk Management.
Risk management is the process of identification, analysis and acceptance or mitigation of uncertainty in investment decisions.
The field of behavioral finance has contributed an important element to the risk equation, demonstrating asymmetry between how people view gains and losses.
Systematic Risk v/s Unsystematic Risk
Systematic Risk:- These risks are applicable to all the sectors but can be controlled. If there is an announcement or event which impacts the entire stock market, a consistent reaction will flow in which is a systematic risk.
Unsystematic Risk:- is an industry or firm-specific threat in each kind of investment. It is also known as “Specific Risk”, “Diversifiable risk” or “Residual Risk”. These are risks which are existing but are unplanned and can occur at any point of causing widespread disruption.
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.
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.
Plan for Diversification
Spread your portfolio among many different investment vehicles – including cash, stocks, bonds, mutual funds, ETFs and other funds.
Stay diversified within each type of investment. Include securities that vary by sector, industry, region, and market capitalization.
Include Securities that vary in risk. Picking different investments with different rates of return will ensure that large gains offset losses in other areas.
Regular Checkups & Rebalancing to make sure their portfolios have a risk level that’s consistent with their financial strategy and goals.
5 Tips for Diversifying Your Portfolio
Spread the Wealth
Consider Index or Bond Funds
Keep Building Your Portfolio
Know When to Get Out
Keep a Watchful Eye on Commissions
Several Other Types of Risk
Risk and Hedging
Hedging is a risk management strategy employed to offset losses in investments.
The reduction in risk typically results in a reduction in potential profits.
Hedging strategies typically involve derivatives, such as options and futures.
Hedging is not the same as speculating, which involves assuming more investment risks to earn profits.
A basic knowledge of hedging strategies will lead to better awareness of how investors and companies work to protect themselves.
