INVESTMENT RISKS

Systematic Risk - Systematic risk influences a large number of assets. A significant political event, for example, could affect several of the assets in your portfolio. It is virtually impossible to protect yourself against this type of risk.

Unsystematic Risk - Unsystematic risk is sometimes referred to as "specific risk". his kind of risk affects a very small number of assets. An example is ne!s that affects a specific stock such as a sudden strike by employees. "iversification is the only !ay to protect yourself from unsystematic risk. #$e !ill discuss diversification later in this tutorial%.

&o! that !e've determined the fundamental types of risk, let's look at more specific types of risk, particularly !hen !e talk about stocks and bonds.

Credit or Default Risk - (redit risk is the risk that a company or individual !ill be unable to pay the contractual interest or principal on its debt obligations. his type of risk is of particular concern to investors !ho hold bonds in their portfolios. )overnment bonds, especially those issued by the federal government, have the least amount of default risk and the lo!est returns, !hile corporate bonds tend to have the highest amount of default risk but also higher interest rates. *onds !ith a lo!er chance of default are considered to be investment grade, !hile bonds !ith higher chances are considered to be +unk bonds. *ond rating services, such as ,oody's, allo!s investors to determine !hich bonds are investment-grade, and !hich bonds are +unk. # o read more, see Junk Bonds: Everything You Need To Know, What Is A Corporate Credit Rating and Corporate Bonds: An Introdu tion To Credit Risk.%

Country Risk - (ountry risk refers to the risk that a country !on't be able to honor its financial commitments. $hen a country defaults on its obligations, this can harm the performance of all other financial instruments in that country as !ell as other countries it has relations !ith. (ountry risk applies to stocks, bonds, mutual funds, options and futures that are issued !ithin a particular country. his type of risk is most often seen in emerging markets or countries that have a severe deficit. #-or related reading, see What Is An E!erging "arket E ono!y# %

Foreign-Exchange Risk - $hen investing in foreign countries you must consider the fact that currency exchange rates can change the price of the asset as !ell. -oreign-exchange risk applies to all financial instruments that are in a currency other than your domestic currency. As an example, if you are a resident of America and invest in some (anadian stock in (anadian dollars, even if the share value appreciates, you may lose money if the (anadian dollar depreciates in relation to the American dollar.

Interest Rate Risk - Interest rate risk is the risk that an investment's value !ill change as a result of a change in interest rates. his risk affects the value of bonds more directly than stocks. # o learn more, read $ow Interest Rates A%%e t The &to k "arket.%

Political Risk - .olitical risk represents the financial risk that a country's government !ill suddenly change its policies. investment. his is a ma+or reason !hy developing countries lack foreign

Market Risk - his is the most familiar of all risks. Also referred to as volatility, market risk is the the day-to-day fluctuations in a stock's price. ,arket risk applies mainly to stocks and options. As a !hole, stocks tend to perform !ell during a bull market and poorly during a bear

market - volatility is not so much a cause but an effect of certain market forces. /olatility is a measure of risk because it refers to the behavior, or "temperament", of your investment rather than the reason for this behavior. *ecause market movement is the reason !hy people can make money from stocks, volatility is essential for returns, and the more unstable the investment the more chance there is that it !ill experience a dramatic change in either direction. As you can see, there are several types of risk that a smart investor should consider and pay careful attention to.