Sources of Risk.

Briefly explain the different sources of Risk.

                                        Figure: Sources of Risk.


As we know that risk is related with human expectation ans has been defined by different scholars in different view point. The potential sources of risk can be pointed out under the following heads.

1. Firm Specific Risk

Business Risk: It is the Uncertainty related to covering the operating cost of any firm. The business which revenue is unstable, has more risk than others.
Example: Real state industry, gold business etc.
Financial Risk: It is the uncertainty related to covering the financial obligation. There is a financial risk when a company cannot repay a loan and the revenue of the business were unstable. 
Example: Real state industry, gold business etc.

2. Shareholder Specific Risk

Interest Risk: The risk is related to change in interest rate.When interest rate increased, the value of investment decreased and when interest rate decreased, the value of investment increased.

Market Risk: It is the market risk that change in market value of any asset because of different market factor. The more a given investment's value responds to the market, the greater its risk; and the less it responds, the smaller its risk.

Liquidity Risk: The risk is related to difficulty that is faced during the liquidation of any asset. Fixed asset has more liquidity risk.

3. Firm & Shareholder Specific Risk

Event Risk: If any unexpected event affect the business significantly, it is called event risk.
Example: Affect on poultry firm for bird flu. 

Purchasing Power Risk: The risk that is faced because of inflation or deflation is called purchasing power risk. Here purchasing power is reduced by over time.
Example: Increases and decreases of flat price.
Exchange Risk: For changing  the exchange rates, it make exchange rate risk. 
Example: Export and import business.

Tax Risk: The risk faced because of change in tax policy.
Example: Tobacco company.