1. Purchasing Power Risk (systematic; cash and equivalents, bonds): is the risk that the return on an investment will be reduced in significant measures by inflation. Such risk is applicable to fixed income investment, particularly short dated ones, such as money market and stable value funds, the historically low yields of which are most vulnerable to inflation over time. [An exception would be in the early 1980s when money market investments sported double digit yields, a result of then Federal Reserve Chairman Paul Volcker's stringent anti-inflationary monetary policy]. Intermediate and longer term bonds do not escape purchasing power risk, either.
  2. Interest Rate Risk (systematic; bonds): is the risk that interest rate changes will affect securities' value. Rising interest rates force down bond prices. Stock prices are negatively affected since borrowing costs tend to rise and bonds become more attractive due to their higher yields.
  3. Exchange Rate Risk (systematic; equities, bonds): the risk of a change between the value of a dollar and the value of a foreign currency in which the investment is made. Such risk exists in international funds. As an example, a U.S. dollar based investor keeps score in dollars and will receive less of a return on his or her investment, all else being equal, if the dollar strengthens relative to the foreign currency. The foreign currency returns translate into fewer dollars. By contrast, a weak dollar benefits the dollar based investor.
  4. Reinvestment Risk (systematic; bonds): the risk that earnings from current investments will not be able to be reinvested at a yield equal or superior to the yield on those current investments. As an example, if an issuer calls a bond yielding 8% in a decreasing interest rate environment, the bondholder is faced with having to reinvest at a lower rate.


Non-Systematic Risks

Related Articles
  1. Investing

    Systematic Risk

    Systematic risk, also known as volatility, non-diversifiable risk or market risk, is the risk everyone assumes when investing in a market. Think of it as the overall, aggregate risk that comes ...
  2. Investing

    Six Biggest Bond Risks

    Don't assume that you can't lose money in this market - you can. Find out how.
  3. Investing

    Understanding Interest Rates, Inflation And Bonds

    Get to know the relationships that determine a bond's price and its payout.
  4. Investing

    5 Fixed Income Plays After the Fed Rate Increase

    Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.
  5. Investing

    Key Strategies To Avoid Negative Bond Returns

    It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses.
  6. Investing

    Spice Up Your Portfolio With International Bonds

    Going global can add flavor and diversity to an otherwise bland basket of bonds.
  7. Investing

    5 Basic Things To Know About Bonds

    Learn these basic terms to breakdown this seemingly complex investment area.
  8. Investing

    What is Reinvestment Risk?

    Reinvestment risk refers to the risk that a bond’s future coupons will have to be reinvested at a lower interest rate.
  9. Investing

    How Exchange Risk Affects Foreign Bonds

    Investors include foreign bonds in their portfolios to take advantage of higher interest rates or yields, and to diversify their holdings. However, the higher return expected from investing in ...
Trading Center