What are Risk in Portfolio Management?

Portfolio Management

Each and every investor has to face risk while investing. What is Risk? Risk is the uncertainty of income/capital appreciation or loss of both. Risk is classified into: Systematic risk or Market related risk and Unsystematic risk or Company related risk.

• Systematic risk refers to that portion of variation in return caused by factors that affect the price of all securities. It cannot be avoided. It relates to economic trends with effect to the whole market. This is further divided into the following:

1 Market risks: A variation in price sparked off due to real, social political and economical events is referred as market risks.

2 Interest rate risks: Uncertainties of future market values and the size of future incomes, caused by fluctuations in the general level of interest is referred to as interest rate risk. Here price of securities tend to move inversely with the change in rate of interest.

3 Inflation risks: Uncertainties in purchasing power is said to be inflation risk.

• Unsystematic risk refers to that portion of risk that is caused due to factors related to a firm or industry. This is further divided into:

1 Business risk: Business risk arises due to changes in operating conditions caused by conditions that thrust upon the firm which are beyond its control such as business cycles, government controls, etc.

2 Internal risk: Internal risk is associated with the efficiency with which a firm conducts its operations within the broader environment imposed upon it.

3 Financial risk: Financial risk is associated with the capital structure of a firm. A firm with no debt financing has no financial risk. The extends depends upon the leverage of the firms capital structure.

Source: http://www.scribd.com/doc/19034755/Portfolio-Management-Services

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Tags: Business, Capital, Financial, Government, Inflation, Interest Rate, Internal, Leverage, Market, Portfolio Management, Risk