key concepts
- Pure risk: a risk that results in an economic loss, like car repairs or appliance replacements
- Inflation risk: prices increase over time
- Usually around 2–3% a year
- Consumer price index (CPI): can use to measure inflation
- Business risk: possibility that company is forced to close
- Interest rate risk: general interest rates will increase, reducing value of most investments
- Liquidity risk: cannot sell something because of weak market
- Systematic risk: risk associated with economic environment in general
- Unsystematic risk: risk that can be reduced through diversification
- Marketability risk: the ability to sell your asset relatively quickly and receive cash in a timely manner
notes
- Rules
- Higher expected returns are associated with greater financial risks
- Financial risk increases as asset liquidity risk increases
- Financial risk increases as marketability risk increases
- Invest so rate of return is greater than rate of inflation