Risk

Risk is the chance of financial loss or more formally, the variability of returns associated with a
given assets.
Risk is defined as the variability of possible return from a project. ----J.C. Vanhorn
Risk is the chance that some unfavorable events will occur. ---- J.F Weston & E.F Brigham
The chance of financial loss or more formally the variability of returns associated with a given
asset.--- Gitman
Classification of Risk
Risk can be classified as follows:
Systematic Risk: This is also called unavoidable risk or non-diversifiable risk. The relevant
portion of an assets risk attributable to market factors that affect all firms, cannot be eliminated
through diversification.
Interest Rate Risk: The chance that changes in interest rates will adversely affect the value of an
investment is called interest risk.
Example: Suppose A company invested Tk.50,000 in a project. The interest rate was 10% for the
project. But it is shown that for some reasons the interest rate of the invested project has raised to
12%. As a result the company now loses value of the project than before.
Market Risk: The chance that the value of an investment will decline because of market factors
that are independent of the investment is called market risk.
Example: Suppose Company A started a project and its duration is 6 months. But for political
instability company couldnt finish the project at 6 months. So this project is a lose project for
company.
Purchasing Power Risk: Purchasing power risk is the chance that changing price levels caused
by inflation or deflation in the economy will adversely affect the firms or investments cash
flows and value.
Example: Suppose the economy is facing the inflation problem. At this time the people have
more money to consume product and the products price will be high. So at this time if a
company invest on those product it can affect the investment value.
Unsystematic Risk: This is also called avoidable or diversifiable risk. The portion of an assets
risk that is attributable to firm specific, random causes, can be eliminated through diversification.
Business Risk: The chance that the firm will unable to cover its operating costs is called business
risk.

Example: Suppose Company B started a business of manufacturing. But after 2 year it showed
that the company cant afford its operating cost. So now the company should be sold or closed.
This is business risk.
Financial Risk: The chance that the firm will be unable to cover its financial obligations is
called financial risk.
Example: If a company cant diminishes its debt it can be measure as a financial risk.