Economics of Financial Markets types of risk
- Created by: AmyTSpokes
- Created on: 16-05-15 17:17
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- Types of Risk
- Investment risk
- we don't know for sure which rate of return to expect from the investment
- Asymmetric risk
- the unequal knowledge that each party to a transaction has about the other party
- Credit risk
- possibility that borrower will default
- Default risk
- chance that the issuer will be unable to make interest payments or pay off the face value once the instrument matures
- Inflation risk
- possibility that inflation exceeds the returns of the investment
- Interest rate risk
- possible reduction in returns associated with interest rate changes
- Systematic risk
- (market risk) part of an asset's risk which cannot be eliminated through diversification
- Political risk
- policy makers have an influence on returns
- e.g. raise taxes on capital gains
- policy makers have an influence on returns
- Moral Hazard
- Risk that 1 party in a transaction will engage in behavior that is undesirable to the other(s)
- Adverse selection
- Caused by Asymmetric information before transaction occurs
- Those who are viewed as undesirable are the ones who are most likely to want to engage in transaction
- Investment risk
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