What is financial risk?
Which scientist initiated modern portfolio theory?
How many categories can financial risks be sorted into?
What types of risk are included in market risk?
What is credit risk management?
What is liquidity risk?
What is operational risk?
What are diversification and hedging?
How can diversification be obtained?
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.
Take our quiz on Financial Risk to test your knowledge on different types of financial risks, their management, and mitigation strategies. Learn about market risk, credit risk, liquidity risk, business risk, and investment risk. Explore the concepts of modern portfolio theory, diversification, hedging, and the use of derivatives in risk management. This quiz is perfect for finance professionals, investors, and anyone interested in understanding financial risk. Put your knowledge to the test and see how well you score!
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