What is 'Macro Risk'

Macro risk is a type of political risk in which political actions in a host country can adversely affect all foreign operations. Macro risk can come about from events that may or may not be in the reigning government's control.

BREAKING DOWN 'Macro Risk'

As an example of macro risk, any company that engages in foreign direct investment in a country that is on the verge of switching to an anti-foreigner slanted government would be facing tremendous macro risk, because the government is likely to expropriate any and all foreign operations, regardless of industry. There are many organizations that provide reports and information on the degree of political risk that a country may possess. Furthermore, companies have the opportunity to purchase political risk insurance from a variety of organizations in order to mitigate potential losses.

Macro risk can refer to economic or financial risk found in stocks and funds, to political risk found in different countries and to the impact of economic or financial variables on political risk. Macro risk can also refer to various economic factors that influence the volatility of investments, assets, portfolios, and the intrinsic value of companies.

Macro risk is both a short- and long-term concern for financial planners, securities traders and investors. Some of the macroeconomic factors that can influence macro risk include unemployment rates, price indexes, monetary policy variables, interest rates, exchange rates, housing starts, agricultural exports and even commodity prices. Macro risk a factor for stock traders and institutions that focus on short-term changes that impact stock returns. These models include the arbitrage pricing theory and the modern portfolio theory families of models. Valuation models and closely related fundamental analysis models also consider macro risk. These models are favorites of wealth managers, financial planners and some institutional investors with long-term views of the market. These models are examples of intrinsic value analysis. In such analysis, forecasts of future company earnings are used to estimate the current and expected value of the investment being studied. Macro risk factors include any economic variables that are used to construct these estimates.

Understanding how macro risk influences the intrinsic value of a particular investment is important because when the factors change values, errors can be introduced in the corresponding intrinsic value forecasts.

Macro Risk and International Investment

Investors also look at macro risk to gauge the political stability and general growth opportunities possible in other countries. Investors can take action either by investing directly into a country or by investing into regionally oriented funds. Macro risk also carries ramifications for credit default swaps and other sophisticated financial products. International rankings of countries, often updated annually, provide insight into their relative political and social stability and economic growth.

RELATED TERMS
  1. Macro Environment

    The macro environment refers to the overall condition of the ...
  2. Global Macro Hedge Fund

    A global macro hedge fund is an actively managed fund that attempts ...
  3. Macro Accounting

    Macro accounting is the compilation of national accounts, or ...
  4. Micro Risk

    Micro risk is type of political risk that refers to political ...
  5. Company Risk

    Company risk is the financial uncertainty faced by an investor ...
  6. Tactical Trading

    Tactical trading is a style of investing for the relatively short ...
Related Articles
  1. Insights

    How to Invest In Developing Markets

    Developing markets can be attractive additions to many investor's portfolios, but carry additional risks that must be considered.
  2. Financial Advisor

    Microeconomics Vs. Macroeconomics

    Economics is divided into two broad categories: micro and macro. Find out what the difference is between them and where they overlap.
  3. 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.
  4. Investing

    The Risks Associated with Common Investments

    Investing inherently involves some risk. Here are some of the different types of investment risks.
  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

    Balancing the Different Risks Investors Face

    One of the keys to investing successfully is to balance different types of risk.
  7. Investing

    Single-Family vs. Multi-Family Homes

    What's the benefit of a single-family home versus multi-family units?
  8. Investing

    6 Risks Threatening Your Portfolio Today

    Factoring in these risks is crucial when building a portfolio.
  9. Investing

    Finding Value In A Sideways Market

    When the market is non-directional, your profit potential need not go sideways too.
  10. Investing

    What Is The Intrinsic Value Of A Stock?

    Intrinsic value reduces the subjective perception of a stock's value by analyzing its fundamentals.
RELATED FAQS
  1. What can a multinational company do to minimize exposure to political risk?

    Political risk is the risk that a country will make political decisions that have adverse effects on corporate profits. Learn ... Read Answer >>
  2. What are the primary sources of market risk?

    Learn about market risk and the four primary sources of market risk including equity, interest rate, foreign exchange and ... Read Answer >>
  3. Why are mutual funds subject to market risk?

    Find out why mutual funds, like all investments, are subject to market risk, including how the different types of market ... Read Answer >>
  4. How can companies reduce internal and external business risk?

    Understand the difference between two types of operational risk – internal risk and external risk – and how companies can ... Read Answer >>
  5. What is the difference between risk avoidance and risk reduction?

    Learn what risk avoidance and risk reduction are, what the differences between the two are, and some techniques investors ... Read Answer >>
  6. What's the difference between EaR, Value at Risk (VaR), and EVE?

    Learn about earnings at risk, value at risk and economic value added, how these risk measures are used, and the difference ... Read Answer >>
Trading Center