When it comes to portfolio management, understanding what is risk in portfolio management is pivotal. In essence, risk in portfolio management refers to the uncertainty that an investment will not achieve its expected returns. The risks involve various factors that can influence the value of the portfolio, ranging from market volatility to currency fluctuations. Integral to this is the concept of risk and return in portfolio management. Typically, higher returns come with higher risks, emphasising the crucial relationship between risk and return in portfolio management.
Types of risks in portfolio management
- Market Risk: This is the risk associated with the overall market movements. It’s the possibility that an investment will lose value because of general market declines, irrespective of the specific attributes of a particular security. Factors like geopolitical events, interest rate changes, and economic downturns can contribute to market
- Credit Risk: This risk arises when a borrower fails to meet their obligations to repay a For investors, it’s the risk that the issuer of a security (like a bond) will default, resulting in a loss of principal and unpaid interest.
- Liquidity Risk: This pertains to the ease with which an asset can be converted into cash without affecting its price. High liquidity risk means an asset cannot be sold quickly without incurring a significant loss in value.
- Operational Risk: This is the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external It includes risks from system failures, fraud, or business disruptions.
- Concentration Risk: This risk is associated with having a significant portion of a portfolio’s investments concentrated in a specific asset class, sector, or individual This risk arises when a PMS portfolio has an imbalanced allocation, focusing heavily on a limited number of stocks, sectors, or asset types.
- Other Risks: While the above are some of the primary risks, there are other risks like inflation risk (loss of purchasing power), interest rate risk (changes in interest rates affecting the value of investments), and currency risk (fluctuations in foreign currency exchange rates affecting the investment’s value), among others.