The inverse of investment return is the risk to which an investment is subject. The academic literature has treated the concept of risk extensively. For the purpose of this discussion, risk may be viewed as the likelihood of an adverse outcome (e.g. loss). A critical component of the portfolio management process is the risk management function. Professional and individual investors alike manage risk rather than return. An understanding of the different investments and investment vehicles discussed in the prior chapter would be incomplete without an understanding of the risks that accompany them. This chapter defines the various types of risk and furnishes examples by illustrating the types of investments to which the various types of risk apply.


Learning Objectives

  • Be able to define and discuss the various types of risk to which investments are subject.
  • Be able to define, discuss and differentiate between systematic and unsystematic types of risk.
  • Be able to give specific examples of various types of investment risk.
  • Be able to compare and contrast the various types of investment risk.
  • Be able to discuss why an understanding of investment risk is critical to the portfolio management process.


The Risk Dichotomy

Related Articles
  1. Managing Wealth

    Risk and Diversification: Different Types of Risk

    Let's take a look at the two basic types of risk: Systematic Risk - Systematic risk influences a large number of assets. A significant political event, for example, could affect several of the ...
  2. Managing Wealth

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
  3. Investing

    How To Manage Portfolio Risk

    Follow these tips to successfully manage portfolio risk.
  4. Managing Wealth

    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 ...
  5. Trading

    Matching Investing Risk Tolerance To Personality

    Understanding risk tolerance is crucial to the advisor/client relationship and any good investment policy statement.
  6. Managing Wealth

    Understanding Market Risk

    Market risk is the chance that an investment’s value will decrease due to a factor that affects all investments across the market.
  7. Managing Wealth

    What is Unsystematic Risk?

    Unsystematic risk is the part of an investment’s risk that is attributable to the investment itself — not to the entire economic system.
  8. Managing Wealth

    Why Risk-Free Investments Don't Exist

    We explain the risks inherent with all types of investments and why risk-free investments do not exist.
  9. Trading

    What Is Your Risk Tolerance?

    Forget the cliches and uncover how much volatility you can really stand.
  10. Managing Wealth

    Determining Risk And The Risk Pyramid

    Many investors do not understand how to determine the risk level their individual portfolios should bear.
Trading Center