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. Personal Finance

    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.
  2. 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 ...
  3. Financial Advisor

    Active Risk vs. Residual Risk: Differences and Examples

    Active risk and residual risk are common risk measurements in portfolio management. This article discusses them, their calculations and their main differences.
  4. Investing

    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.
  5. Managing Wealth

    Why Companies Need Risk Management

    Implementing risk management strategies can save an entire organization from failure. Is yours up to snuff?
  6. Investing

    Understanding Risk is Key to Your Investing Strategy

    Here's why considering all types of risk is crucial for a successful investment plan.
  7. Investing

    Low Vs. High-Risk Investments For Beginners

    Understanding risk is key to better investing.
  8. Investing

    The Importance Of Diversification

    Without this risk-reduction technique, your chance of loss will be unnecessarily high.
  9. Trading

    What Is Your Risk Tolerance?

    Forget the cliches and uncover how much volatility you can really stand.
Frequently Asked Questions
  1. Why Do Most of My Mortgage Payments Start Out as Interest?

    Fear not: Over the life of the mortgage, the portions of interest to principal will change.
  2. What is the difference between secured and unsecured debts?

    The differences between secured and unsecured debt, and how banks buffer risks associated with each type of loan through ...
  3. How Many Times has Warren Buffett Been Married?

    Warren Buffett has been married twice in his life, but the circumstances surrounding the marriages were unconventional.
  4. What's the smallest number of shares of stock that I can buy?

    Many people would say the smallest number of shares an investor can purchase is one, but the real answer is not as straightforward. ...
Trading Center