Types of Financial Risk

Investment risk is the uncertainty about the return on investment. Every saving and investment action involves different risks and returns. In general, financial theory classifies investment risks into two categories:

systematic risk and unsystematic risk.

Systematic risk is the market-wide variation in returns that can be attributed to economic, financial or other broad market influences. Examples of systematic risks are interest rates, inflation, international currency movements and changes in government regulations.

Unsystematic risk is specific to individual securities or investments and cannot be diversified away. Examples of unsystematic risks are business failure, management quality, labor relations and product obsolescence.


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