Risk Management with Special Reference to Investment Risks

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Topics: Risk, Finance, Bond
RISK MANAGEMENT WITH SPECIAL REFERENCE TO INVESTMENT RISKS

INTRODUCTION
Risk in holding securities is generally associated with possibility that realized returns will be less than the returns that were expected. The source of such disappointment is the failure of dividends (interest) or the securities price to materialize as expected.

FORCES INFLUENCING INVESTMENT RISKS

External Sources of Systematic Risk: In investments, those forces that are external to the firm, uncontrollable and broadly affect large number of securities are called sources of systematic risk.

Internal Sources of Unsystematic Risk: Those forces that are internal to the firm, controllable and somewhat peculiar to industries or firms are referred to as sources of unsystematic risk.

SYSTEMATIC RISK AND UNSYSTEMATIC RISK

Systematic risk refers to that portion of total variability in return caused by factors affecting the prices of all securities. Economic, political, and sociological changes are sources of systematic risk. Their effect is to cause prices of nearly all individual common stocks and/or all individual bonds to move together in the same manner

Unsystematic risk is the portion of total risk that is unique to a firm or industry. Factors such as management capability, consumer preferences, and labor strikes cause systematic variability of returns in a firm.

WAYS TO MANAGE INVESTMENT RISKS

Market Risk Protection
The standard deviation and beta indicate the volatility of the stock. The National Stock Exchange News bulletin provides this information. Looking at the beta values, the investor can gauge the risk factor and make wise decision according to his risk tolerance.

Protection against Interest Rate Risk
The investors can also buy treasury bills and bonds of short maturity. Another suggested solution is to invest in bonds with different maturity dates.

Protection against inflation
The general opinion is that the bonds or debentures with fixed return

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