Financial Risk Quiz

Financial Risk: Types, Management, and Mitigation

• Financial risk refers to various types of risk associated with financing, including financial transactions that include company loans in risk of default.
• Modern portfolio theory, initiated by Dr. Harry Markowitz in 1952, is a science that has evolved around managing market and financial risk under the general title of modern portfolio theory.
• Financial risks can be sorted into five different categories, namely market risk, liquidity risk, credit risk, business risk, and investment risk.
• Market risk includes equity risk, interest rate risk, currency risk, and commodity risk.
• Credit risk management is a profession that focuses on reducing and preventing losses by understanding and measuring the probability of those losses, primarily associated with non-payment of loans.
• Liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss or make the required profit.
• Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events.
• Non-financial risks summarize all other possible risks.
• Diversification and hedging are methods for reducing risk.
• Diversification can be obtained by diversifying across asset classes, and it has costs.
• Hedging is a method for reducing risk where a combination of assets is selected to offset the movements of each other.
• Derivatives are used extensively to mitigate many types of risk.