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456 Corporate Finance BRILLIANT’S

Generally, investment is made in any financial \$m`ZopÝe`b AgoQ> _| BÝdoñQ>_|Q>, n`m©ßV [aQ>Z© H$s Cå_rX
asset with an expected return. However, risky go {H$`m OmVm h¡Ÿ& hmbm§{H$ {OZ AgoQ²>g Ho$ gmW [añH$
assets rarely produce their expected rates of Ow‹S>r hmoVr h¢ do Ano{jV [aQ>Z© `Xm-H$Xm hr àXmZ H$aVo
return- they earn either more or less than was h¢- CZH$m [aQ>Z© `m Vmo Anojm go A{YH$ hmoVm h¡ `m H$_Ÿ&
originally expected. Infact, if assets always
dmñVd, _| `{X H$moB© AgoQ> h_oem Ano{jV [aQ>Z© XoZo bJo
produce their expected returns, they would not
be risky. Thus, the investment risk is related to Vmo dh [añH$s Zht hmoJrŸ& AV… BÝdoñQ>_oÝQ> [añH$ Bg ~mV
the probability of actually earning a low or H$s gå^mdZm go gå~pÝYV h¡ {H$ dmñV{dH$ [aQ>Z© Ano{jV
negative return. [aQ>Z© go H$_ hmoJmŸ&
Suppose, a company is planning to invest _mZ br{OE EH$ H$ånZr {H$gr ßbmÝQ> _| A{YH$
a large sum of money in a plant to produce a _mÌm _| YZ H$m BÝdoñQ>_|Q> H$aZo H$s `moOZm ~Zm ahr h¡
new product. The demand for this product {Oggo {H$gr ZE àmoS>ŠQ> H$m àmoS>ŠeZ {H$`m OmEJmŸ& Bg
may be sensitive to the general economic àmoS>ŠQ> H$s {S>_mÊS> OZab BH$moZm°{_H$ H§$S>reÝg Ho$ AZwgma
conditions. It may be very high under
favourable economic conditions and very low g§doXZerb hmo gH$Vr h¡Ÿ& \o$dao~b BH$moZm°{_H$ H§$S>reÝg _|
under unfavourable economic conditions. In A{YH$ hmo gH$Vr h¡ Am¡a AZ\o$dao~b BH$moZm°{_H$ H§$S>reÝg
the former situation, the investment would be _| ~hþV H$_ ^r hmo gH$Vr h¡Ÿ& nhbr pñW{V _| BÝdoñQ>_|Q>
profitable and in the latter case, it would be àm°{\$Q>o~b hmoJm O~{H$ Xygar pñW{V _| `h AZàm°{\$Q>o~b
unprofitable. But, it is quite difficult to predict hmoJmŸ& {H$ÝVw BH$moZm°{_H$ H§$S>reÝg H$m â`yMa Š`m hmoJm
the future state of economic conditions. Due to BgH$m nydm©Zw_mZ bJmZm ~ohX H${R>Z h¡Ÿ& BH$moZm°{_H$ H§$S>reÝg
uncertainty of the economic conditions, the
cash flows associated with the investment also H$s A{ZpíMVVm Ho$ H$maU BÝdoñQ>_oÝQ> go Ow‹S>o H¡$e-âbmoO
become uncertain. ^r A{ZpíMV hmo OmVo h¢Ÿ&
Types and Sources of Risk in Invest- BÝdoñQ>_|Q> gå~ÝYr {ZU©` _| [añH$ Ho$ àH$ma Ed§
ment Decisions òmoV

The risk associated with an investment {H$gr BÝdoñQ>_|Q> {S>grOZ go g§~§{YV [añH$ H$mo {d{^ÝZ
decision can be measured in different ways. VarH$m| go _mnm Om gH$Vm h¡Ÿ& hmbm§{H$ {H$gr {d{eîQ> àH$ma
However, no particular type of risk will be
useful for evaluating all investment proposals. H$s [añH$ H$mo g^r BÝdoñQ>_oÝQ> ànmoOëg Ho$ _yë`m§H$Z hoVw
Following are the broad à`wŠV Zht {H$`m Om gH$VmŸ& [añH$ Ho$ àH$ma
categories of the types of risks and Types and Sources of Ed§ CZHo$ òmoV _w»`V… {ZåZ{b{IV h¡…
their sources: Risk in Investment
Decisions
1. Project Specific Risk: It is 1. àmoOoŠQ> go g§~§{YV [añH$: `h
the risk associated with the 1. Project Specific Risk [añH$ àmoOoŠQ> go Ow‹S>r hþB© hmoVr h¡ Omo `m
project, either because of wrong 2. General Economic Vmo JbV Am§H$bZ Ho$ H$maU `m àmoOoŠQ> Ho$
estimation or because of factors Conditions Hw$N> {deof \¡$ŠQ>g© Ho$ H$maU CËnÝZ hmoVr
specific to that project. Such type 3. Industrial Condition h¢Ÿ& Bg àH$ma H$s [añH$ Cgr àmoOoŠQ> H$mo
of risk affects only the project 4. Company Specific
under consideration and may Risk à^m{dV H$aVr h¡ Omo {dMmamYrZ h¡ VWm
arise from factors specific to that 5. Market Risk Cg àmoOoŠQ> go Ow‹S>o \¡$ŠQ>g© go CËnÝZ hmo
project. 6. International Risk gH$Vr h¢Ÿ&