Risks of Investment

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Risks of Investment

• Dr. Robert T. LeClair
• Department of Finance
• Villanova School of Business

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Risks of Investment

• Business / Operating (unsystematic risk)
• Market (systematic risk)
• Price Level / Purchasing Power
• Money Rate / Interest Rate

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Business/Operating RiskUnsystematic Risk

• The ability of a company to meet its financial
  obligations.
• Obligations to whom?
• Shareholders vs. Stakeholders
• Diversifiable Risk

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Diversifiable Nondiversifiable Risk
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Market RiskSystematic Risk

• That part of a securitys risk common to all
  securities of the same class cannot be
  eliminated by diversification

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Purchasing Power RiskPrice Level Risk

• Risk of inflation
• Decline in the purchasing power of the dollar
• Cumulative impact over time
• Most relevant for fixed-income investments, ie.,
  bonds preferred stocks

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Consumer Price Index (CPI)Bureau of Labor
Statistics
Base Year CPI Base Year CPI July 13
1967 100.0 ???
1982-84 100.0 ???
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Consumer Price Index (CPI)Bureau of Labor
Statistics
Base Year CPI Base Year CPI July 13
1967 100.0 699.8
1982-84 100.0 ???
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Consumer Price Index (CPI)Bureau of Labor
Statistics
Base Year CPI Base Year CPI July 13
1967 100.0 689.8
1982-84 100.0 233.6
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Interest Rate Risk

• The effect on an investments principal value
  (price) and income (cash flow) when interest
  rates change.

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Interest Rate Risk
Long- Term Short- Term
Price
Income
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Interest Rate Risk
Long- Term Short- Term
Price High Risk Low Risk
Income
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Wishbone
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Interest Rate Risk
Long- Term Short- Term
Price High Risk Low Risk
Income
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Interest Rate Risk
Long- Term Short- Term
Price High Risk Low Risk
Income Low Risk High Risk
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U. S. Treasury Yield Curve ()September 6, 2013
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Living Yield Curve1977 - 2013

• www.smartmoney.com/investing/bonds/the-living-yiel
  d-curve-7923/

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Whip
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