Investment risk refers to the possibility of losing some or all of an investment’s value. It encompasses the uncertainty regarding the returns on an investment, which can be influenced by various factors including market volatility, economic changes, changes in interest rates, and individual asset performance. Investment risk can manifest in several forms, such as market risk, credit risk, liquidity risk, and operational risk.
Market risk arises from changes in the overall market, affecting the prices of investments. Credit risk is the potential for loss due to a borrower’s failure to repay a loan or meet contractual obligations. Liquidity risk refers to the difficulty in selling an asset without significantly affecting its price, while operational risk encompasses failures in internal processes or systems.
Investors assess risk to make informed decisions in aligning their investment strategies with their risk tolerance and financial goals. Understanding investment risk is crucial for managing potential losses and optimizing returns in a portfolio. Risks can be mitigated through diversification, research, and strategic asset allocation.
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