2. Introduction
Any rational investor before investing his or her
investible wealth in the stock, analyses the risk
associated with the particular stock. The actual return
he receives from a stock may vary from his expected
return and the risk is expresses in variability of return.
The downside risk may be caused by various
factors, either common to all stocks or specific to a
particular stock. Investor in general would like to
analyse the risk factors and knowledge of the risks
helps him to plan his portfolio in such a manner so as
to minimise the risk.
3. Risk defined
The dictionary meaning of risk is the possibility or loss
or injury; the degree or probability of such loss.
Risk consists of two components
(I) Systematic risk
(II) Unsystematic risk
4. Systematic risk: the systematic risk affects the entire
market. Often we read in the newspaper that the stock
market is in bear hug or in the bull grip. This indicates
that the entire market is moving in a particular
direction. The political changes, economic
conditions, and sociological changes affect the security
market.
It can be of three types
(I) Market risk
(II) Interest rate risk
(III) Purchasing power risk
5. Market risk: Market risk is that portion of total
variability of return caused by the alternating forces of
bull and bear markets. When the security index moves
upward haltingly for a significant period of time it is
known as bull market and the other situation is called
bear market.
6. Interest rate risk: Interest rate risk is the variation in
the single period rates of return caused by the
fluctuations in the market interest rate. Most
commonly interest rate risk affects the price of
bonds, debentures and stocks.
The fluctuations in the interest rates are caused by
changes in the monetary policy and the changes that
occur in the interest rates of treasury bills and govt.
bonds.
7. Purchasing power risk: variations in return are
caused also by the loss of purchasing power of
currency. Inflation is the reason behind the loss of
purchasing power. The level of inflation proceeds
faster than the increase in the capital value.
Purchasing power risk is probable loss in the
purchasing power of returns to be received. The rise in
price penalizes the returns to the investor, and every
potential rise in price is a risk to the investor.
8. Inflation may be demand pull or cost push.
Demand pull inflation: when prices go up because
demand is more than the actual supply.
Cost push: when company increases the prices so as to
cover up the increasing cost.
