CFA Level 1 - Portfolio Management
These risks comprise systematic risk, and cannot be avoided through diversification since they affect the entire market.
- Business Risk: Business risk is the risk that a business' cash flow will not meet its needs due to uncertainty in the company's business lines.
- Financial Risk: Financial riskis the risk to equity holders as a company increases its debt load. As debt load increases, interest expense also increases, leading to less income to be paid out to investors.
- Liquidity Risk: Liquidity risk is the uncertainty around the ability to sell an investment. The more liquid an investment is the easier it is to sell.
- Exchange-Rate Risk: Exchange-rate risk is the risk a company faces when it has businesses in othercountries. When a company is in the business of producing or buying products in a country other than its own, a company can face exchange-rate risk when in the process when it needs to exchange currency to transact business as a part of its normal business routine.
- Political Risk: Political risk is the risk of changes in the political environment of a country in which company transacts its businesses. This risk could be caused by changes in laws relating to a specific business or even more serious as a country revolution that would cause disruption in a company's operations.
Learn how the expected extra return on stocks is measured and why academic studies usually estimate a low premium in the article Risk Premium.