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

    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.
  5. 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.
  6. Investing

    How to Manage Risk With Bonds in Your Portfolio

    Bonds are not immune to risk, so be sure to diversify your portfolio with proper asset allocation.
  7. Investing

    5 Basic Things To Know About Bonds

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

    Spice Up Your Portfolio With International Bonds

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

    Find The Right Bond At The Right Time

    Find out which bonds you should be investing in and when you should be buying them.
Frequently Asked Questions
  1. Who is eligible for Canada Pension Plan benefits?

    Learn more about the Canada Pension Plan, who contributes to the plan and who can receive standard, disability, early retirement ...
  2. Who are Monsanto's main competitors?

    Learn about Monsanto Company's two main operating divisions and its main competitors within each sector, including The Mosaic ...
  3. What is an assumable mortgage?

    The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ...
  4. Do I have to complete all exams within a certain period of time to receive the CFA charter?

    According to the CFA Institute, a candidate can take as much time as necessary to complete all three levels of the CFA program.Therefore, ...
Trading Center