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Liquidity Risk
Market Risk
Firm and Shareholder Risks These are infrequent, The chance that a totally unexpected event usually affecting only a will have a significant effect on the value of small group of firms or a firm or a specific investment. investments.
Event Risk
Exchange Risk
Rate
The exposure of future unexpected cash flows to fluctuations in the currency exchange rate.
The chance that changing price levels Purchasing Power caused by inflation and deflation in the Risk economy will adversely affect the firms investments cash flows and value. The chance that unfavorable changes in tax laws will occur.
Tax Risk
The greater the chance of undesirables exchange rate fluctuations, the greater the risk of cash flows. Firms and investments whose price moves with the general price levels have lower Purchasing Power risk. Firms and investments that are sensitive to changes in tax law are more risky.
Return - The total gain or loss experienced on an investment over a given period of time. - Formula for rate of return: rt = Ct + P t -Pt-1 Pt-1 Where: rt = expected rate of return Ct = cash flow in time t P t = price of asset in time t Pt-1= cash flow of asset in time t-1 Risk Preferences a)Risk Indifferent the attitude towards risk in which no change in returns would be required for an increase in risk b) Risk Averse the attitude towards risk in which an increased return would be required for an increase in risk. c) Risk Seeking The attitude toward risk in which a decreased return would be accepted for an increase in risk.