2. Risk is the possibility of loss or injury , the degree or
probability of such loss.
Actual Return different than Expected.
Risk is directly related to expected return.
Risk return-tradeoff
3. Wrong decision of what to Invest in
Wrong timing of Investment
Nature of instrument invested
Creditworthiness of issuer
Maturity period
National and International factors
4. Degree of uncertainty associated with an Investments earnings
and the Investments ability to pay the returns (Interest ,principal,
dividends )owed Investors.
It is the portion of unsystematic risk caused by the
operating environment of the business.
Inability to maintain competitive edge & stability of
earnings.
e.g., changes in tastes, preferences of consumers,
strikes, increased competition, change in government
policy, obsolescence etc .
Business risks may depends upon the nature and size
of the business.
5. Strategic Risk: They are the risks associated with the
operations of that particular industry. These kind of
risks arise from
◦ Business Environment: Buyers and sellers interacting to buy
and sell goods and services, changes in supply and demand,
competitive structures and introduction of new technologies.
◦ Investor Relations: Strategy for communicating with
individuals who have invested in the business.
Research and Development
Fixed cost
Single product
6. Financial Risk: These are the risks associated with the
financial structure and transactions of the particular
industry.
Operational Risk: These are the risks associated with the
operational and administrative procedures of the
particular industry.
"the risk of a change in value caused by the fact that
actual losses, incurred for inadequate or failed internal
processes, people and systems, or from external events
(including legal risk), differ from the expected losses".
7. Compliance Risk(Legal Risk): These are risks
associated with the need to comply with the rules
and regulations of the government.
1) socio and regulatory factors
2) Political Risk
3) Business cycle
Other risks: There would be different risks like
natural disaster(floods) and others depend upon
the nature and scale of the industry.[8]
8. Degree of uncertainty of payment resulting from a mix
of debt and equity, the larger the proportion of debt
financing, the greater the risk.
The use of debt with the owned fund to increase the
return to the shareholder is called Financial Leverage.
Financial risk is an umbrella term for multiple types
of risk associated with financing, including financial
transactions that include company loans in risk
of default.
Variance (or standard deviation) of a portfolio is used
as the definition of risk.
9. CREDIT RISK
refers to the risk that a borrower will default on a debt by
failing to make required payments. the risk is that of the
lender and includes lost principal and interest, disruption
to cash flows, and increased collection costs. The loss may
be complete or partial and can arise in a number of
circumstances……….
payment due on a mortgage loan, credit card, line of
credit, or other loan.
A company is unable to repay asset-secured fixed
or floating charge debt.
A business does not pay an employee's earned wages when
due.
A business or government bond issuer does not make a
payment on a coupon
Insolvent bank won't return funds to a depositor.
10. In the United States, a section on market risk is mandated by the SEC.2] in
all annual reports submitted on Form 10-K. The company must detail how
its own results may depend directly on financial markets.
Significant resources and sophisticated programs are used to analyze and
manage risk. Some companies run a credit risk department whose job is to
assess the financial health of their customers, and extend credit (or not)
accordingly.
They may use in house programs to advise on avoiding, reducing and
transferring risk. They also use third party provided intelligence.
Companies like Standard & Poor's, Moody's, Fitch Ratings, DBRS, Dun
and Bradstreet, Bureau van Dijk and Rapid Ratings International provide
such information for a fee.
12. Risk that a given security or asset cannot
be traded quickly enough in the market to
prevent a loss (or make the required profit).
Operational Risk
Risk of a change in value caused by the fact that
actual losses, incurred for inadequate or failed
internal processes, people and systems, or from
external events (including legal risk), different from
the expected losses".
13. Legal risk is the risk of loss to an institution which
is primarily caused by:
Defective transaction
Failing to take appropriate measures to protect
assets (for example, intellectual property) owned
by the institution.
Change in law.
Volatility Risk
the risk of a change of price of a portfolio as a
result of changes in the volatility of a risk factor. It
usually applies to portfolios of derivatives
instruments, where the volatility of its underlyings
is a major influencer of prices. Examples : Futures
contracts
14. Political risk
The prospect that government decisions will
damage the value of your investments. Whether it’s
the safety of Social Security, and how it might affect
stocks in your portfolio, tax-law changes or more,
this is the chance that broad policy decisions hit
home.
Macro political risks affect all participants in a given
country. A common misconception is that macro-
level political risk only looks at country-level political
risk; however, the coupling of local, national, and
regional political events often means that events at
the local level may have follow-on effects for
stakeholders on a macro-level
16. Financial leverage
Use of the fixed-charges sources of funds, such as debt and
preference capital along with the owners’ equity in the capital
structure, is called as financial leverage
The financial leverage employed by a company is intended to earn
more return on the fixed-charge funds than their costs. The surplus
(or deficit) will increase (or decrease) the return on the owners’
equity.
17. Particulars March 15 March 14 March 13 March 12
Debt Equity Ratio
10.30 8.99 8.68 8.19
Debt to Owners 10.64 9.49 9.06 8.42
Debt Coverage R
atios
1.25 1.25 1.23 1.25
Financial Charges
Coverage ratio
1.25 1.26 1.23 1.25
The first two measures of financial
leverage can be expressed either in terms
of book values or market values. These two
measures are also known as measures of
capital gearing.
The third & fourth measure of financial
leverage, commonly known as coverage
ratio. The reciprocal of interest coverage is
a measure of the firm’s income gearing.
18. Operating risk can be defined as the variability of EBIT (or
return on total assets). The environment—internal and
external—in which a firm operates determines the variability
of EBIT
◦ The variability of EBIT has two components:
◦ variability of sales
◦ variability of expenses
Financial risk
◦ The variability of EPS caused by the use of financial
leverage is called financial risk. Financial risk is an
avoidable risk if the firm decides not to use any debt in its
capital structure.
20. PATICULARS MARCH 15 MARCH 14 VARIATION
DEBT RATIO 10.30 8.99 14.57
EPS 27.47 26.10 5.24
21.
22. Change your business structure from a sole proprietorship to corporation or limited
liability company where you have limited liability.
Transfer risk to insurance companies by insuring against major risks such as
damage to your facilities, product liability, injuries to customers or suppliers and
death or incapacity of company principals.
Evaluate the controls and reporting system by comparing actual practice and
performance to the control procedures and the reported information.
Reduce financial risk by managing your accounts receivable to minimize
outstanding balances and identify poor credit risks. Evaluate customer payments
and ask for advance payment from customers who don't meet the standards.
Reduce financial risk by keeping outstanding loans and financing needs to a
minimum. Control growth at a rate that the company can finance internally. If the
company can't pay off some loans, replace short-term credit with long-term, fixed-
rate loans
Editor's Notes
LOOSING SOME
ALL ACTUAL INVESTMENT
3)Such as equity bond are more risky than the bank deposits
If the earning of firm s not adequate to meeet
Conider an exampe
Boom steel industries
Small companies closed
Political 1977 swadeshi change in govt.policy gold
A science has evolved around managing market and financial risk under the general title of modern portfolio theory initiated by Dr.Harry Markowitz in 1952 with his article, "Portfolio Selection"
Significant resources and sophisticated programs are used to analyze and manage risk.[4] Some companies run a credit risk department whose job is to assess the financial health of their customers, and extend credit (or not) accordingly. They may use in house programs to advise on avoiding, reducing and transferring risk. They also use third party provided intelligence. Companies like Standard & Poor's, Moody's, Fitch Ratings, DBRS, Dun and Bradstreet, Bureau van Dijk and Rapid Ratings International provide such information for a fee.
In the United States, a section on market risk is mandated by the SEC[2] in all annual reports submitted on Form 10-K. The company must detail how its own results may depend directly on financial markets. Equity risk is "the financial risk involved in holding equity in a particular investment." Equity risk often refers to equity in companies through the purchase of stocks, and does not commonly refer to the risk in paying into real estate or building equity in propert
. Interest rate risk is the risk that arises for bond owners from fluctuating interest rates How much interest rate risk a bond
