Objectives of Risk Analysis in Financial Market Essay

Objectives of Risk Analysis in Financial Market - Essay Example Every buyer in a financial market is an investor. To maximize the profit, buyers are usually ready to take risk. Risk management is a very important concept in both money and capital market. To manage the risk, investors usually diversify it. Risk in the financial market can be divided into two: Systematic risks and Unsystematic risks. Systematic Risks Systematic risk is defined as â€Å"The risk that tends to affect the entire market similarly†. (Kidwell et al. 2007) It is also known as market risk or nondiversifiable risk. Systematic risk is the risk that cannot be reduced or predicted in any manner. Systematic risks are those risks which nobody can predict. As you cannot foresee it, you cannot reduce it or protect yourself against it. For example, the recent political turmoil in Egypt sent all the share markets in the world downward. All investors lost a lot of sum. This political crisis was unpredictable and no investor was able to protect his investment against this downf all. Most investors are primarily concerned with systematic risk as they can reduce unsystematic risk through diversification. Economists use the term ‘beta’ to show the relationship between a stock’s return and the general market movement. For example, if you assign beta 1 to general market (index) and 2 to a particular share, it means if the market goes up 20%, the share goes up 40% and if the market goes down 10%, the share goes down 20%. It means, this particular share is twice as volatile as the market index. Shares with betas greater than 1 are called aggressive shares as they carry more risk than the market. In addition, they affect the entire portfolio in a greater degree than the market...This paper describes financial market, outlines different types of risks in that market and methods for buyers to reduce the risk. Financial market is a mechanism that enables buyers and sellers to meet their financial requirements. Buyers are the investors who purchase short term or long term financial assets while sellers raise funds for their short term and long term requirements. The globalization made world markets more integrated and provided more opportunities in overseas investments. Based on the instruments dealt in the market, financial market divides into money market and capital market. To maximize the profit, buyers are usually ready to take risk. Money market deals with short term trading (buying and selling) of financial assets which have maturity period of one year or less. Capital market deals with securities (debt or equity) which companies and governments used to raise long term funds. To maximize the profit, buyers are usually ready to take risk. To manage the risk, investors usually diversify it. Risk in the financial market can be divided into two: systematic risks and unsystematic risks. Systematic risk is defined as â€Å"The risk that tends to affect the entire market similarly†. It is also known as market risk or nondiversifiable risk. Systematic risk is the risk that cannot be reduced or predicted in any manner. Most investors are primarily concerned with systematic risk as they can reduce unsystematic risk through diversification. Unsystematic risk is defined as â€Å"The unique or security specific risks that tend partially to offset one another in a portfolio Foreign exchange risk occurs due to changes in exchange rate