What are the different types of investment risks?
The different types of investment risks include market risk, credit risk, liquidity risk, interest rate risk, and operational risk. Market risk arises from fluctuations in market prices. Credit risk involves the possibility of a borrower defaulting. Liquidity risk is the challenge of selling investments quickly. Interest rate risk refers to the impact of changing interest rates. Operational risk stems from failures in internal processes or systems.
How can investors manage and mitigate investment risks?
Investors can manage and mitigate investment risks by diversifying their portfolio, conducting thorough research before investing, setting stop-loss orders to limit potential losses, and regularly reviewing and adjusting their investment strategy to align with changing market conditions and personal financial goals.
What factors should be considered when assessing investment risk?
When assessing investment risk, consider the market risk, credit risk, liquidity risk, inflation risk, interest rate risk, and political or regulatory risk. Also, evaluate the investment's time horizon, economic conditions, and the investor's risk tolerance and financial goals.
What is the relationship between investment risk and return?
The relationship between investment risk and return is typically direct; higher potential returns usually accompany higher levels of risk, as investors demand a risk premium for taking on additional uncertainty. Conversely, lower-risk investments generally offer lower potential returns.
How does diversification help in reducing investment risk?
Diversification helps reduce investment risk by spreading investments across various assets, sectors, or geographic regions. This ensures that poor performance in one investment is offset by better performance in others, lowering overall risk and volatility.