What are the Basic Types of Risk?
We know that future is uncertain, because of uncertainty; involvement of risk can be traced to our every part of life. When we talk about any investment we have to think about risk and return, higher the risk higher the rates of return and lower the risk lower the rates of return. Our life is directly related with economic activities where risk is the considerable element that cannot be overlooked.
To minimize the risk people go for savings and some people take the help of insurance companies/ agencies by paying insurance premium. Risk can be categories into different perspective but here we only discuss about the business risk.
Before discussing the types of risk, let’s have some idea of risk. Risk is the deviation between the actual outcome and expected outcome. Some risk can be minimized and some risk cannot be minimized. Some risk arisen from the micro economic factor and some from macro economic factors.
Basic types of risk that we may found are:
Basic Types of Risk
Unsystematic Risk
Unsystematic risk is that portion of risk which can be minimize through diversification of the investment by forming portfolio. If we form a portfolio using the negatively correlated investment securities then it would be possible to minimize the risk at lower level. This types of risk is known as diversiable risk Theoretically it is possible to eliminate the portion of unsystematic risk but in real sense it is not possible to eliminate the risk through diversification.
Systematic Risk
Systematic risk is that portion of risk which cannot minimize through diversification of the investments. Systematic risk is mainly arisen from the macro economic variables which are beyond our control. Beta is the measure of the systematic risk. Sometimes this risk is also known as systematic market risk. Sources of systematic risk are given below with short explanation.
Business Risk
Business risk is the risk which mainly arise when a firm or business organization unable to generate sufficient revenue to maintain its operating expenditure through providing service or selling products, that is risk is directly related with the operation of the firm.
Financial Risk
When a firm is unable to pay off its fixed financial obligation then this type of risk may arise. This type of risk is involved with the levered firm which uses debt capital for business. In some cases this risk can lead a lead a company to bankruptcy.
Liquidity Risk
This risk is involved with the marketability of a security or investment that is the capacity to generate asset into cash as much quicker as possible. If an investment is takes less time to convert into cash then it is liquid asset or investment.
Country Risk
Unstable political condition of a country is responsible for this type of risk. If this risk is more than an economy definitely fall, so does business. In our Bangladesh this type of risk is higher.
Exchange Rate Risk
Exchange of currency is required when a country is involved with import and export. For importing product or services foreign currency basically dollar is used. So if there is more fluctuation of the exchange rate frequently then a business may incur loss. This probable loss is the risk for the business.
Although every economic activity is involved with risk, we need to be more cautious to minimize the risk. If we can minimize the risk of doing business then it will be possible to generate profit for the company/ business organization.
Written by
Md. Nahian Mahmud Shaikat
Student of MBA
Institute of Business Administration (IBA)
Jahangirnagar University
Email: [email protected]
Facebook: Nahian Mahmud Shaikat