Cyclical Risk

AAA

DEFINITION of 'Cyclical Risk'

The risk of business cycles or other economic cycles adversely affecting the returns of an investment, an asset class or an individual company's profits. Cyclical risks exist because the broad economy has been shown to move in cycles – periods of peak performance followed by a downturn, then a trough of low activity. Between the peak and trough of a business or other economic cycle, investments may fall in value to reflect the uncertainty surrounding future returns as compared with the recent past.

Cyclical risk can also be tied to inflationary risks, as some investors consider inflation to be cyclical in nature.

INVESTOPEDIA EXPLAINS 'Cyclical Risk'

Cyclical risk does not typically have a tangible measure, but instead is reflected in the prices or valuations of assets that are deemed to have higher or lower cyclical risks than the market. For example, certain stocks are considered cyclical because company net earnings tend to rise and fall with the business cycle and may be volatile from peak to trough.

These stocks will typically sell off (fall in price) when the economy first shows signs of a slowdown, and therefore earnings valuations will fall compared to the broad market. Conversely, cyclical stocks will typically rise faster than the broad market when the economy is coming out of the trough period of the business cycle, as these stocks are now seen as able to grow earnings faster in the near future.

Cyclical risk of inflation can be somewhat mitigated by purchasing inflation-protected securities or through the use of derivatives.

RELATED TERMS
  1. Business Cycle

    The fluctuations in economic activity that an economy experiences ...
  2. Systematic Risk

    The risk inherent to the entire market or entire market segment. ...
  3. Toppy

    A slang term used when markets are reaching highs that are unstable, ...
  4. Diversification

    A risk management technique that mixes a wide variety of investments ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in ...
  6. Procyclic

    A condition of positive correlation between the value of a good, ...
RELATED FAQS
  1. What are the different types of price discrimination and how are they used?

    Price discrimination is one of the competitive practices used by larger, established businesses in an attempt to profit from ... Read Full Answer >>
  2. What are the different sources of business risk?

    A certain risk level is inherent in running a business. A company cannot completely eliminate risk, but it can control or ... Read Full Answer >>
  3. How does the law of diminishing returns affect marginal revenue?

    The law of diminishing returns is better thought of as the law of increasing opportunity costs. The law states that -- if ... Read Full Answer >>
  4. What is the theory of asymmetric information in economics?

    The theory of asymmetric information was developed in the 1970s and 1980s as a plausible explanation for common phenomena ... Read Full Answer >>
  5. How does market risk differ from specific risk?

    Market risk and specific risk are two different forms of risk that affect assets. All investment assets can be separated ... Read Full Answer >>
  6. What stage of the economic cycle is usually the best for an investor to enter the ...

    The best time during the economic cycle for an investor to enter the electronics sector is when he has confidently identified ... Read Full Answer >>
Related Articles
  1. Investing

    The Ups And Downs Of Investing In Cyclical Stocks

    This strategy can be profitable but only if you know when to dump these stocks.
  2. Markets

    Great Company Or Growing Industry?

    Look at the big picture when choosing a company - what you see may really be a stage in its industry's growth.
  3. Active Trading

    Peter Lynch On Playing The Market

    Everyone can appreciate great advice from a professional. Read on to benefit from the vast experience of Peter Lynch.
  4. Active Trading Fundamentals

    Recession: What Does It Mean To Investors?

    Understanding the business cycle and your own investment style can help you cope with an economic decline.
  5. Investing

    Earnings Cyclicality Exposes Profitable Trends

    Learn to explore a company's past profits to find today's opportunities.
  6. Economics

    What Is Supply?

    Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics.
  7. Economics

    What is a Management Buyout?

    A management buyout, or MBO, is a transaction where a company's management team purchases the assets and operations of the business they manage.
  8. Economics

    Modified Internal Rate of Return (MIRR)

    Modified internal rate of return (MIRR) is a variant of the more traditional internal rate of return calculation.
  9. Economics

    Explaining Cash On Delivery

    Cash on delivery, also referred to as COD, is a method of shipping goods to buyers who do not have credit terms with the seller.
  10. Credit & Loans

    What's a Revolving Line of Credit?

    A revolving line of credit is an arrangement made between a company or an individual and a bank to borrow money on a short-term basis.

You May Also Like

Hot Definitions
  1. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  2. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  3. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  4. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  5. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center