What is a 'Risk Asset'

A risk asset is any asset that carries a degree of risk. Risk asset generally refers to assets that have a significant degree of price volatility, such as equities, commodities, high-yield bonds, real estate and currencies. Specifically in the banking context, risk asset refers to an asset owned by a bank or financial institution whose value may fluctuate due to changes in interest rates, credit quality, repayment risk and so on. The term may also refer to equity capital in a financially stretched or near-bankrupt company, as its shareholders’ claims would rank below those of the firm’s bondholders’ and other lenders.

BREAKING DOWN 'Risk Asset'

Investor appetite for risk assets swings considerably over time. The period from 2003 to 2007 was one of huge risk appetite, as rampant investor demand drove up prices of most assets associated with above-average risk, including commodities, emerging markets, subprime mortgage-backed securities, as well as currencies of commodity exporters such as Canada and Australia. The global recession of 2008 to 2009 triggered massive aversion for risk assets, as capital fled to the quintessential safe-haven of U.S. Treasuries.

Since March 2009, as swings in risk appetite became more pronounced due to global macroeconomic concerns, such as European sovereign debt (in 2010 and 2011) and the U.S. fiscal cliff (in 2012), market-watchers began referring to times when investors have substantial appetite for risk assets as "risk on" periods and intervals of risk aversion as "risk off" periods.

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