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1. PRESENTED BY; ADIL
MEHRAJ 100129 MBA

2. RISK
Risk is the part of every human endeavor. From the
moment we get up in the morning, drive or take public
transportation to get to school or to work until we get
back into our beds (and perhaps even afterwards), we
are exposed to risks of different degrees. What makes
the study of risk fascinating is that while some of this
risk bearing may not be completely voluntary, we seek
out some risk on our own (speeding on the highways
or gambling, for instance) and enjoy them.

3. RISK
The phenomenon of risk is closely related to the concept of
uncertainty which human lives face routinely. What is not
known today becomes uncertainty, and if this state affects us in
an unfavorable way, we often conclude this outcome of
uncertainty as a loss and the potential of uncertainty to behave
in such a way as risk.

4. RISK
Holton (2004) argues that two ingredients are needed for
risk to exist. The first one is uncertainty about the
potential outcome from an experiment, and the other is that
the outcomes have to matter in terms of providing utility.
In other words, a person jumping out of an airplane
without a parachute faces no risk since he is certain to die
(no uncertainty)

5. RISK
Risk is incorporated into so many different disciplines from insurance to
engineering to portfolio management that it should come as no surprise that it is
defined in different ways by each one. It is worth looking at some of the
distinctions:
 Risk versus probability – Whereas some definitions of risk focus only on the probability of an
event occurring, more comprehensive definitions incorporate both the probability of the event
occurring and the consequences of the event. Thus, the probability of a severe earthquake may
be small, but the consequences are so catastrophic that it would be categorized as a high-risk
event.
 Risk versus threat – In some disciplines, a contrast is drawn between risk and a threat. A
threat is a low-probability event with large negative consequences, where analysts may be
unable to assess the probability. A risk, on the other hand, is defined to be a higher
probability event, where there is enough information to assess both the probability and the
consequences.

6. RISK
 All outcomes versus negative outcomes – Some definitions of risk tend to
focus only on the downside scenario, whereas others are more expansive and
consider all variability as risk. The engineering definition of risk defined as
the product of the probability of an event occurring, that is viewed as
undesirable, and an assessment of the expected harm form the event
occurring.
Risk = Probability of an accident * Consequence in lost money/deaths.
In contrast, risk is finance is defined in terms of variability of actual returns on
investment around an expected return, even when those returns represent
positive outcomes. Building on the last distinction, we should consider broader
definitions of risk that capture both the positive and negative outcomes.

7. • The values of firm’s assets, liabilities
and operating income vary continually
in response to changes in a flurry of
economic and financial variables such
as exchange rates, interest
rates, inflation rates.
• These uncertainties are known as
macro-economic environmental risks.

8. • Moreover, uncertainties related to its
operating business such as interruptions
in raw material supply, labour
troubles, success or failure of a new
product or technology and so forth have
an impact on the firm’s performance.
These can be grouped under the heading
as core business risks

9. • core business risks: Firm Specific
• macro-economic environmental risks :
Economy related

10. SYSTEMETIC
RISK
UN-
SYSTEMETIC

11. SYSTEMATIC RISK
It is also termed as non-diversifiable risk because it cannot be avoided
SYSTEMATIC RISK
Inflation Risk
Interest Rate Risk
Political Risk
Market Risk
Risk Due To Government Policies
Natural Calamities
Scams/Malpractices
Monsoon
Industrial Growth And Output
International Events
War-like Situation/ Internal Peace

12. SYSTEMATIC RISK
Inflation Risk
It causes loss of purchasing power, due to which real gains from
investment are very low as compared to monetary gains. Inflation
affects the price of shares as well as debentures. Due to rising
inflation, the returns expected by the investors tend to increase and
they discount future earnings at a higher discount rate, which pulls
the prices further down. Inflation also influences the real yield from
bonds, which happens to be much lower than the normal interest
rate. The declining rate affects the market price of the bonds
adversely. However, companies have started issuing
debentures/bonds, which provide for protection against rising
interest rate, e.g. flotation rate debentures, index linked
debentures/bonds, etc.

13. SYSTEMATIC RISK
Interest Rate Risk
Interest rate in an economy tends to fluctuate either on account of regularity
framework or due to market forces. If the general interest rate rise then it pushes
up the investors’ expected rate of return from investment, due to which
prevailing share prices become unattractive. Another effect of increased expected
rate of return is that, low yield debentures or bonds become unattractive at the
prevailing price due to which prices of these also tumble down. Thus interest
rate also accounts for a major part of the systematic risk for investment
activities. Recently, a frequent change in the interest rates by RBI affected the
stock market. RBI change the bank rate , CRR, repo and reverse repo rates very
frequently this change resulted in the change in the expectation of return by
investors followed by a frequent change in the share prices on the stock market.

14. SYSTEMATIC RISK
Political Risk
Performance of industries and stock market depends on a country’s political
scenario. Political uncertainty adversely affects share prices.
Market Risk
Price of securities (shares, stocks and debentures) depend quite upon the
activities of operators/speculators in the market. The risk that because general
market pressures will cause the value of an investment to fluctuate, it may be
necessary to liquidate a position during a down period in the cycle. Market risk
is highest for securities with above-average price volatility and lowest for stable
securities such as Treasury bills. Market risk is of little consequence to a person
who purchases securities with the intention of holding them for long periods.
Market Risk is the risk of losses due to movements in financial
market variables. These may be interest rates, foreign exchange
rates, security prices, etc. Thus market risk is the risk of fluctuations
in portfolio value because of movements in such variables.

15. SYSTEMATIC RISK
Changing Government Policies
the changing policies of a government can definitely affect the movement of
share prices. Whenever the government announces a change in
taxation, licensing, quota restrictions and foreign trade policies etc. and this in
turn, affects the profitability of industry, then the share price show a declining
trend. A favorable announcement has a positive impact and vice versa.
Natural Calamities
Disasters, tsunamis, floods etc. may affect the stock market badly. This may
happen because of fear of loss for industrial houses at large.

16. SYSTEMATIC RISK
Monsoon Weather
Indian economy is an agrarian economy and hence the performance of an
industry is dependent on the monsoon to a great extent. A significant portion of
the Gross Domestic Product (GDP) comes from agriculture. A bad monsoon has
an adverse effect on the share prices of all the companies.
Scams and Malpractices
scams a like Satyam scam, Harshad Mehta scam, CRB scam, and many other
scams have not only affect their share prices but also the prices of other company
shares. Scams also create psyche of fear in the minds of investors and they start
selling every kind of share whether good or bad. This activity creates excessive
supply in in the market and makes price decline. The stock market is always
driven by the forces of demand and supply. When demand and supply are not in
equilibrium, then certainly distorted prices prevail in the market.

17. SYSTEMATIC RISK
Industrial Performance
share price depend largely on the profits declared by the companies. Investors
always give more weight to high profits. Every year when the economic survey
report is presented, there is a possibility that share prices get affected, depending
on the industrial growth assessment as shown in the survey report.
International Events
in the recent years (2008) when recession hit all the economies of the world or the
present situation of recession (2011) almost hit all the prices of stocks. Terrorist
attacks on worldwide or other international trade policies etc. also responsible
for changes in the stock market.
War-Like Situation/Internal Peace
whenever there is internal disturbance in the economy; it immediately gets
discounted in the share prices. Since, everyone wants to sell their shares to meet
urgency. Increased selling pressure affects share prices.

18. UNSYSTEMATIC RISK
This kind of risk is due to industry or company-specific factors
This type of risk can either be reduced or eliminated through diversification.
UN-SYSTEMATIC RISK
Business Risk
Financial Risk
Risk Due To Industry-Specific
Policies
Disputes

19. UNSYSTEMATIC RISK
Business Risk
It gets created due to operation of a company or business. A
company might not be able to sell its products due to imperfections
in its operating activities. As a result, the company might incur
losses, which certainly has an adverse effect on share prices of such
company. Because risk originates due to operating leverage and
wrong planning about the operations of a company. It can be
measured with the help of degree of operating leverage.

20. UNSYSTEMATIC RISK
Financial risk
• Introduction of fixed cost item.
It occurs due to wrong financial planning. A company having high degree of
debt certainly has high financial leverage, which has an adverse effect on the
earnings of the company. The unfavorable effect of high financial leverage is
observed at the time of declining EBIT, which sometimes might erode the capital
of the company too. Hence, companies with high financial leverage are
considered as high risky and vice versa.
[A financial risk arises as a result of uncertainties in the financial markets
which are manifested by changes in the value of market parameters like
interest rates, stock prices, and the price of currencies…]

21. SYSTEMATIC RISK
Risk Due To Industry-Specific Policies
sometimes government policies are against a particular industry, due to which
the performance/profitability of the company of such industry gets badly
affected. This creates a negative effect on the share price of such companies.
These policies may include removal of subsidy, concessions or imposing high
taxes or a ban on a product/raw material.

22. UNSYSTEMATIC RISK
Disputes
share prices of few companies get effected adversely as and when
there is a situation of industrial dispute, labour management unrest,
lockout or strike. Even the disputes among the promoters or owners
have a bad effect on the share prices.

23. THANK
YOU