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CONCEPT OF RISK

What is Risk ?

Risk can be referred to as uncertainty or stability in the expected return
to be received from an investment. In the financial dictionary, risk is
defined as a chance of a monetary loss. If a project has a greater
probability of loss, then it is viewed as more risky than projects that
have a lesser probability of loss.

TYPES OF RISK

a) Systematic Risk:

- Referring to the risks affecting mostly the stock market. It is also known
as "market risk". An example of this risk is inflation, changes in foreign
exchange rates and changes in tax rates.

- The risk is also known as the risk that cannot be avoided. Risk cannot
be reduced by “diversification”.

b) Non Systematic Risk:

- Referring to the risk that does not affect the market but only affects
the firm.

- Example: shortage of raw materials, new competitors producing the
same products, change of management and labour strike.

- This risk can be minimized or eliminated through “diversification”.