Risk in a traditional sense has to do with the possibility that the realised returns will eventually be less than expected returns. Such a disappointment has it source from the failure of interests or the security’s price so as to materialise as expected. All forces that eventually contribute to the variation in return price constitute the elements of risks. Some of these elements are external to the firm itself and cannot be controlled thereby affecting large number of securities. Other influences which can be controlled by a large degree are internal to the firm. In investments, those external factors which cannot be controlled are referred to as systematic risks. Whereas the internal and controllable factors are referred to as unsystematic risks. In managing risk, knowing the various types of risks is of primary importance.
Talking of systematic risks, we are eventually referring to that portion of the total variability in return which is caused by factors affecting the prices of all the securities. Some sources of systematic risks are economic, sociological and political changes. They all have an effect which is causing the prices of all individual stocks to move together nearly in the same manner. In using, up to one half the total risk encountered in an average common risk stock is systematic in origin. Some of the unsystematic risks are discussed below;
Generally it is not common finding stock prices falling from time to time whereas a company’s earnings are rising or the other way round. Even though earning remains practically unchanged, it is common to find the price of a stock fluctuating within just a short span of time. It is true the cause of this phenomenon are eventually varied but the principle cause remains the change in attitude of the investor towards equities in general. Market risks is referred to the variability in the returns of most of the common stocks actually due to the sweeping change in investor expectations. All the market risks are caused by the investor’s reactions to tangible and intangible events as the pop up. When there exist expectations of lower cooperate profits, this eventually leads to the larger body of common to actually fall in price. All investors eventually express their judgement that just too much is often paid for earning in the light of anticipated events. Basis for such a reaction has to do with a complete set of political, real, tangible events, social and economic events. All intangible events are related closely to the market psychology. A reaction to any real event usually touches off the market risk. An initial decline in the market can eventually cause the fear of loss to grip investors. Thereby leading the investors to look for an exit.
Interest rate risk
The uncertainty of the future market values together with the size of the future income, which are all caused by the general fluctuations in the level of interest rates is actually referred to as interest rate risk. Interest rate risk has its root cause which actually lies on the fact that as the rate of interest paid to the government securities does rises in one way or the other or does falls, the return rates which are demanded on the on the other alternative rate investment vehicles which are issued all in the private sector do rise or fall.
Purchasing power risk
The uncertainty of the purchasing power of the amount to be received is actually referred to as purchasing power risk. In order words, purchasing power risk refers to the complete impact of deflation on a particular investment. The rising prices which are associated to goods and services are generally referred to as inflation. Whereas the falling of prices associated to goods and services are referred to as deflation. Both inflation and deflation are all covered in the purchasing power risk. Generally today, the purchasing power risk has been identified with inflation, that is the rising of prices associated to goods and services. All rational investors should see on including in all their estimates of expected returns an allowance reserved for purchasing power risk. This can be done in a suitable form like the expected annual percentage change in price.
The portion of total risk that is unique to an industry or firm is associated to unsystematic risk. Some factors like consumer preferences, management capabilities and labour strikes can eventually cause unsystematic variability of returns on a company’s stock. These factors are to be examined in a separate manner because they affect an industry or a particular firm in a special way. The uncertainty which does rounds an issuer on making all payments on security actually stems from two great sources. These two sources are: the business’s operating environment and the source of finance to the firm. These risk are respectively referred to as a business risk and financial risk. In a strict manner these two are a function of the operating conditions of the firm together with the way the firm eventually chooses to finance its operations.
Business risks are so often referred to as functions of the present operating conditions which are all faced by a firm together with the vulnerability these conditions do insert in to the operating income. Business risks are expected to increase 10% every year over a foreseeable future. As operating earnings actually grow to as little as 6% or up to 14% so grows the business risks but in a higher way than if the range went from 11% to 9%. All business risks can be divided in to two broad categories namely; external and internal business risks. Internal business risk is associated in a large manner with the actual efficiency in which a firm does conduct all its operations. All firms in an individual way do have their personal internal risks. The degree to which each of these firms does cope with the internal risk is reflected in its operating efficiency. To a greater extent, external business risk has to do with the results of all operating conditions actually imposed by circumstances beyond the firm’s control.
Financial risks has to do with the actual ways and strategies in which a company finances its transactions. Generally financial risk is gauged by looking at the capital structure the firm possesses. If there should exist borrowed money or debt in the capital structure, then it actually creates fixed payments which are often in the form of interest which must be sustained by the firm. Generally financial risk is one of the avoidable risks, as these can be observed to the extent where managements possess the freedom to borrow or not to borrow any funds. Any firm existing with no debt financing has no financial risk at its table. Any firm which dares to engage in to debt financing does so by changing the characteristics of the earning streams which are available to the common stock holders. The actual reliance on debt financing also known as financial leverage, does have three important effects not to be neglected. These effects do act on the common stock holders and are:
- Debt financing does increases the variability’s of the common stock holders
- Debt financing does affects the expectations of common stock holders concerning their returns
- Debt financing does increases the risks of common stock holders to be ruined
Every investor’s wish is guarding self from the above risks, so below are some of the ways in which the guarding can be done through techniques of managing risks and risk management. This can obviously be done by first understanding the risk’s nature thus carefully taking on your plans.
Market risk protection
- As a risk management strategy, the investor has to study in a detail manner the price behaviour of the stock. This is because of the fact history in a general manner often repeats itself even though not in a perfect manner. Any available stock which shows a considerable growth pattern might continue in this way for a significant period of time. A suitable examples is the Indian stock market which is actually expected to keep up with it growth pattern for some additional time in information technology stock while depressions continue still in all related textile stock. Most stocks are often cyclical stocks and its wise avoiding such stocks.The volatility of the stock is indicated by the standard deviation.
- The standard deviation is actually available for all the stocks that are included to the indices. Such information is provided in details by the National Stock Exchange News bulletin. All investors seeking risk management can look just at the beta values and gauge with ease the risk factor thereby making just wise decisions from their risk tolerance. In addition all investors seeking ways of managing risk should be prepared to hold back the stock for a period of time so as to reap the benefits coming from the rising trends in the market. All investors seeking risk management should be careful when it comes to timing and sale of the stock.
Protection against interest rate risk
- Any investor seeking risk management can buy treasury bills together with bonds of just a short maturity. Nevertheless even the portfolio manager can also invest in the treasury bills and the money eventually reinvested into the market so as to actually suit the dominant interest rates.
- Another risk management strategy is investing in bonds possessing different maturity dates. When such bonds do attain their maturity on different dates, reinvestment can actually be done following the changes in the investment climates. The best results can be yielded from maturity diversification.
Protection against inflation
- The general opinion is the fact that bonds with fixed returns cannot solve the problem. But the truth is that if a bond yield is 13 to 15% possessing a very low risk factor then a hedge would eventually be provided against inflation.
- Another risk managing way is having investments just in short term securities thereby staying away from long term investments. This is because in a long term, the rising consumer price index may just erase the real rate of interest.
- In all real estate investments, the investors have to diversify their investments, precious metals and arts together with investments in securities.
Protection against business and financial risks
- in order to guard and protect self from business risk, the investor has to analyse in a detail manner the actual strength together with the weakness of the industry to which to company actually belongs. After such is done, it is better to avoid if it should be noticed that the weakness of the industry is more of government interference through her rules and regulations.
- It is of great importance analysing the trend of the company’s profitability. Once the calculation of the standard deviation does yield the variability of the return. Check and if it is found inconsistency in the earnings, it is wise to stay away from it. The investor seeking to avoid risk has to choose a stock possessing a consistent track record.
- The capital structure of the company should be analysed carefully so as to minimise all financial risks. All investors should possess a sense of caution if they should notice an increase in the equity debt ratio. An investor should select a highly levered company just in a boom periods and not in recession periods.
A network can be referred to as a group of computers and other devices which are all connected in different ways permeating them to carry out the exchange of data amongst them. Each device found on the network can be thought of as a node; each existing node has a unique address. A network can also possess a name that humans can easily retain than numbers. In a modern network, data is transferred using packet switching. A network news transfer protocol does allows constitution of communication groups which are well organised around a particular subject matter. A simple network management protocol allows the correct management of the network.