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Understanding Risk and ReturnT 1. Interest rate risk is the risk that the value of an investment will decrease due to a rise in interest rates. The value of a fixed-return investment decreases when interest rates increase and increases when interest rates go down. 2. Business failure risk is the risk that the business will fail and the investment will be worthless or that the business will be less profitable than expected. How well will the business do in both good and bad economic times? 3. Market price risk is the risk that the price of an investment will go down. Many factors influence whether the price of an investment will go up or down. Few investors can consistently predict the ups and downs of the market. Investors may experience a loss if they must sell when the market price is down. 4. Inflation risk is the risk that the financial return on an investment will lose purchasing power due to a general rise in prices of goods and services. Investment returns must be more than what the rate of inflation is in order to truly increase in value. 5. Political risk is the risk that government actions such as trade restrictions or increased taxes will negatively affect business profits and investment returns. 6. Fraud risk is the risk that the investment is designed to deceive and misrepresent facts. In every case of investment fraud, the seller wins while the buyer loses. It is crucial that you understand all of these risks. You financial life depends on it.
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