introduction to finance and accounts
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DISCLAIMER: While the document has attempted to make the information as accurate as possible, the information on this document is for personal and/or
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Introduction to Finance and Accounts Notes, First Edition
Copyright 2013 Akshansh
ALL RIGHTS RESERVED.
Presented by: Akshansh Chaudhary
Graduate of BITS Pilani, Dubai Campus
Batch of 2011
Course content by: Dr. Aqila Raffiuddin
Then Faculty, BITS Pilani, Dubai Campus
Layout design by: AC Creations 2013
The course content was prepared during Fall, 2014.
More content available at:www.Akshansh.weebly.com
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Diversification:It relates to diversifying my ways of investing. I try to invest in a wide variety of options so that the negative effects of one may counterthe positive of the other. So, in the end, I dont face loss even if the market of one type collapses. I have reduced my risk.Further diversification benefits can be gained by investing in foreign securities because they tend be less closely correlated with domesticinvestments. For example, an economic downturn in the U.S. economy may not affect Japan's economy in the same way; therefore,having Japanese investments would allow an investor to have a small cushion of protection against losses due to an American economicdownturn.
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Types of RiskDefault Risk i.e., the risk for the borrower or debtor if the borrowed/lent money will be paid on time
r not.
Credit Risk i.e., the risk for the bank, if I take money from the bank, whether I will pay back or not.
ettlement Risk i.e., the risk for both the parties just in case the settlement of trade or anything doesnot take place as expected.
Financial Risk i.e., the risk that is there for the shareholders as they might lose their money, becausehe company on debt financing may not be able to repay its debt.
Liquidity Risk i.e., a risk that arises from the difficulty of selling an asset, considering the times whenn investment is required to be sold off quickly.
Maturity Risk i.e., the risk in making long term investments considering the market changes and Iannot predict that much.
Market risk (or Systematic Risk, or, Undiversifiable Risk) i.e., the risk that the value of my assetsmight change based on the factors that affect the entire market. Affects overall market, not a
articular stock or industry.or example, putting some assets in bonds and other assets in stocks can mitigate systematic risk because an interest rate shift that makesonds less valuable will tend to make stocks more valuable, and vice versa, thus limiting the overall change in the portfolios value fromystematic changes. Interest rate changes, inflation, recessions and wars all represent sources of systematic risk because they affect the entire
market. Systematic risk underlies all other investment risks.
Unsystematic risk (or specific risk, or diversifiable risk, or residual risk) i.e., the risk that is specifico a particular type of business, or does not affect everyone.xamples of unsystematic risk include a new competitor, a regulatory change, a management change and a product recall.
Operational Risk i.e., anything that can be a risk in doing the operations of a company successfully.Also includes legal risk, like failure to comply with laws.
nterest Rate Risk or Funding risk i.e., the risk on change in the value of my asset in case the interest
ate change.
nflation Risk i.e., the possibility that the value of assets or income will decrease as inflation shrinkshe purchasing power of a currency.
Exchange rate of currency riski.e., the risk when the exchange rate changes in internationalransactions, leading to cash variability
Country Risk i.e., the risk associated with investing in a foreign country.
Business Risk i.e., the risk on what will happen with the company based on all the internal andxternal factors of the business.
Total riskis the total variability in the return on the asset or the portfolio, It is the combination ofystematic and unsystematic risk.
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