- state in which each alternative leads to one of a set of specific outcomes, each outcome occurring with a probability that is known to a decision maker.
- variation in earnings, sales, or other financial variable.
- probability of a financial problem affecting the company's operational performance or financial position, such as economic risk, political uncertainties, and industry problems. See also uncertainty.
uncertainty that an asset will earn an expected rate of return, or that a loss may occur. Because banks invest much of their funds in interest sensitive assets, primarily loans, there are several categories of including:
settlement risk-the possibility that the failure of a major bank, or its inability to honor payment commitments in a wire transfer network will have a domino effect on other banks, causing similar failures elsewhere. Also known as systemic risk.
measurable possibility of losing or not gaining value. Risk is differentiated from uncertainty, which is not measurable. Among the commonly encountered types of risk are these:
Actuarial risk: risk an insurance underwriter covers in exchange for premiums, such as the risk of premature death.
Exchange risk: chance of loss on foreign currency exchange.
Inflation risk: chance that the value of assets or income will be eroded as inflation shrinks the value of a country's currency.
Interest rate risk: possibility that a fixed-rate debt instrument will decline in value as a result of a rise in interest rates.
Inventory risk: possibility that price changes, obsolescence, or other factors will shrink the value of inventory.
Liquidity risk: possibility that an investor will not be able to buy or sell a commodity or security quickly enough or in sufficient quantities because buying or selling opportunities are limited.
Political risk: possibility of nationalization or other unfavorable government action.
Repayment (credit) risk: chance that a borrower or trade debtor will not repay an obligation as promised.
Risk of principal: chance that invested capital will drop in value.
Systematic risk: risk affecting an entire business or industry, not just one company.
Underwriting risk: risk taken by an investment banker that a new issue of securities purchased outright will not be bought by the public and/or that the market price will drop during the offering period.
Unsystematic risk: one-time occurrence that may affect a single property of business, such as a fire.
See also amount at risk; at-risk rules; assumption of risk.
- with reference to fluctuating market values of securities and portfolios, risk means exposure to uncertainty, which is manifest as variability (or, synonymously, volatility), and is measured by standard deviation.
- in its stricter and narrower senses, risk means the potential for loss of value. Among the commonly encountered types of risk are these:
Actuarial risk: risk an insurance underwriter covers in exchange for premiums, such as the risk of premature death.
Exchange risk: chance of loss on foreign currency exchange.
Inflation risk: chance that the value of assets or of income will be eroded as inflation shrinks the value of a country's currency.
Interest rate risk: possibility that a fixed-rate debt instrument will decline in value as a result of a rise in interest rates.
Inventory risk: possibility that price changes, obsolescence, or other factors will shrink the value of inventory.
Liquidity risk: possibility that an investor will not be able to buy or sell a commodity or security quickly enough or in sufficient quantities because buying or selling opportunities are limited.
Political risk: possibility of nationalization or other unfavorable government action.
Repayment (credit) risk: chance that a borrower or trade debtor will not repay an obligation as promised.
Risk of principal: chance that invested capital will drop in value.
Underwriting risk: risk taken by an investment banker that a new issue of securities purchased outright will not be bought by the public and/or that the market price will drop during the offering period.
uncertainty of financial loss; term used to designate an insured or a peril insured against.
uncertainty or variability. The possibility that returns from an investment will be greater or less than forecast. Diversification of investments provides some protection against risk.
Example: Types of risk in real estate:- business risk-rents, vacancies, or operating expenses vary from projected amounts
- interest risk-property may be subject to a higher rate mortgage than the market rate
- market rental rate-a long-term lease may lock the owner into low rents
- principal risk-resale proceeds may be less than anticipated
the possibility of a loss. Insurance can offer protection against certain risks.
Example: Owners insure buildings against risk of loss caused by fires, storms, and other hazards by taking out a hazard insurance policy.
