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, a 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.

How Risk Assets Can Affect a Portfolio

A period of a rise and a subsequent fall off in value of unregulated cryptocurrency is another example of a risk asset experiencing the fluctuations indicative of the market. After cryptocurrencies such as Bitcoin saw increased use for transactions, including on "darknet" markets, their value saw rapid growth. Traditional financial institutions soon sought to explore the underlying blockchain technology that validates cryptocurrency transactions and the overall attention focused on digital assets became heightened.

Early investors in cryptocurrency saw exponential gains and other prospectors followed suit looking to build wealth by investing, sometimes with varying degrees of understanding the potential hazards. The expectation of seeing fast returns on their investments continued to attract new investors, which has been described as hype or "overhype." A combination of factors, starting in late 2017 and continuing into 2018, led to a sudden decline in value that erased not only the gains but the entire value of some investments in cryptocurrency.  

A rise in discussions for potential regulation of cryptocurrency, coupled with fears of overspeculation, contributed to the decline of this risk asset.

RELATED TERMS
  1. Risk Profile

    A risk profile is an evaluation of an individual or organization's ...
  2. Cryptocurrency

    A cruptocurrency is a digital or virtual currency that uses cryptography. ...
  3. Accepting Risk

    Accepting risk occurs when a business acknowledges that the potential ...
  4. Price Risk

    Price risk is the risk of a decline in the value of a security ...
  5. Company Risk

    Company risk is the financial uncertainty faced by an investor ...
  6. Business Risk

    Business risk is the possibility a company will have lower than ...
Related Articles
  1. Tech

    Could Cryptocurrencies Replace Cash?

    The debate whether Bitcoin is currency rages on, the true test will be if cryptocurrencies are able to replace cash.
  2. 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.
  3. Tech

    Cryptocurrency Market Cap Reaches Record High of $30 Billion

    The market capitalization of all cryptocurrencies continues to grow at an incredible rate.
  4. Tech

    Why Cryptocurrency Market Fell 40% From Its Record High

    The latest downswing further confirms the cryptocurrency industry's unique volatility.
  5. Investing

    Understanding Risk is Key to Your Investing Strategy

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

    Which Cryptocurrencies Will Survive A Crash In The Markets?

    There are 1,385 cryptocurrencies on the market today. Some experts say 90% would not survive a crash.
  7. Tech

    Cryptocurrency Hedge Funds Gained More Than 1,000% In 2017

    Nine cryptocurrency funds gained 1,167% as a group in 2017.
  8. Tech

    6 Ways Cryptocurrencies Make the World a Better Place

    Despite criticism, here are several ways the cryptocurrency industry has arguably made the world a better place.
  9. Tech

    A Brief History of Cryptocurrency

    A brief history of cryptocurrency and some insight into how it works, why it has value, and whether it's a bubble or here to stay.
  10. Tech

    What Caused the Massive Cryptocurrency Correction Last Weekend?

    Last weekend saw sudden plunges in the prices of leading cryptocurrencies. Here's why they might have fallen so fast.
RELATED FAQS
  1. What are the major categories of financial risk for a company?

    Examine four major categories of financial risk for a business that represent potential problems that a company may have ... Read Answer >>
  2. 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 >>
  3. Financial Risk vs Business Risk

    Understand the key differences between a company's financial risk and its business risk – along with some of the factors ... Read Answer >>
  4. 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 >>
  5. What are some examples of risks associated with financial markets?

    Find out about the different types of risks for different classes of assets including volatility, counterparty risk and default ... Read Answer >>
  6. What are some examples of risk management techniques?

    Understand what risk management is in business and why it is a necessary component of ongoing business planning, and review ... Read Answer >>
Trading Center