Risk

Question 1

What differentiates systematic & non-systematic risk?

Answer 1

Non-systematic is the risk inherent from each industry specific investment whereas systematic is that associated with the whole market. Thus, it is undiversifiable.

Question 2

Which asset classes are examples of those exposed to liquidity risk?

Answer 2

Property and unlisted share

Question 3

Which asset classes are examples of those exposed to interest rate and inflation risk?

Answer 3

Cash and fixed interest

Question 4

What are the different types of credit risk?

Answer 4

Default risk - where the creditor fails to pay the bondholder
Downgrade risk - lower rated a bond is, more an investor would expect to receive as a coupon
Credit spread - during volatile times, investors will flood into gilts, pushing their prices up relative to the coupon offered
Bail-in risk - where a company fails and they use investors’ money to bail out the firm

Question 5

What are the two ways cash can suffer from interest rate risk?

Answer 5

If you fix into a deal, the interest rate may rise meaning that you have forsaken potential interest payments.
Additionally, there is reinvestment risk where the consumer may not get as good a deal when they come out of the fixed rate period.