What is pure risk is a big topic in financial theory. If you ever play the stock market, you have probably heard the term many times over in relation to analyzing risk. But what exactly is it and how can you use it?
In simple terms, pure risk is an investment that is considered “pure” because it carries no inherent risks of loss with it. Some examples include currency, bonds, and stocks. This may sound good in theory, but how do you know if an investment is pure risk? You have to analyze the investment and look at all the factors which can effect the value of that stock or bond.
For instance, if you are investing in the financial sector, like banking or corporations, it is unlikely that you will hear the term pure risk used often. This simply comes from the fact that the banking industry is very large and can affect many different industries. However, if you look closely at some of the smaller companies which dominate the sector, they are also exposed to a lot of risk. So, as you can see, this terminology can be tricky and it is something that you need to understand when you are analyzing pure risk in an investment.
Many investors ask this question because they are not sure if there really is such thing as absolute risk free investment. Risk can be described as the chance that an investment will lose money. For example, if you are willing to put your home on the line for one hundred thousand dollars, you are taking a calculated risk. However, if you are willing to give that same house away for only two hundred fifty thousand dollars, you are taking a reduced risk.
So the real answer to the question should I invest is, “I don’t know.” Each individual is risk managing differently. Some people are risk adverse, some are risk amenable. Some people like to invest using momentum (the up side) while others use geometric trends or simply don’t care at all about it. The bottom line is, each person has to learn his own way.
Some investors choose to invest with a mentor. This person sees the opportunity and allows the individual to make his own decisions. Others prefer to invest alone in a brokerage account. There are advantages and disadvantages to both approaches.
If you are willing to invest with a mentor who has more experience and education than you do, he is your best choice. This person sees the opportunity in front of him and he can take steps that will reduce risk. On the other hand, an individual who is more risk averse would not fare as well. He could get the education that he needs from a book written by a famous risk taker.
A pure risk is any investment that has no correlation to any market sector. For example, the bonds that are rated high by Standard & Poor’s or the CDs that are insured by the Federal Deposit Insurance Corporation are pure risk. Investments that are rated low by these same two agencies are considered to be intrinsically correlated risk products. For example, the bond that is insured by the FDI can provide a higher return than the bond that is insured by S & P. The underlying asset is not affected by the rating of the bond that the investor purchases.
Another type of risk product is referred to as a pure attempt. Examples of pure risks include commodity markets, options, foreign exchange, and stocks. These types of investments have no correlations to the underlying index, which minimizes the potential for loss. However, some of these ventures do face the risk of loss due to the speculative nature of the investment itself. These include bonds, options, and foreign exchange markets.
The last type of risk is referred to as residual risk. It refers to risk that remains even after an investment has been completely realized. This type of risk exists in all types of venture capital investments such as mergers and acquisitions. For example, if you are buying a pharmaceutical company, there is a risk that the pharmaceutical will lose its patent rights. You may end up losing a lot of money if this occurs.
A combination of pure risk and residual risk is referred to as hybrid risk. A hybrid risk portfolio is designed to minimize risk while still maintaining a strong return on your investment. Most hybrid risk funds are designed by professional investors who analyze various investment opportunities in the market and then combine these into one effective portfolio.
There are many ways to manage risk and it is important that you select the appropriate mix for your own individual needs. You should consider the amount of risk you are willing to tolerate and how diverse your investing portfolio should be. Managed risk products include things like options, bonds, and mutual funds. It is also important that you keep in mind that just because a venture is pure risk doesn’t mean that it is without opportunities for success. Choosing an appropriate mix of managed risk products will help you ensure your overall portfolio is as strong as possible.
Investing in general requires that you think through the consequences of different investment strategies before proceeding. The mix of risk tolerance you choose with what you invest in is a very important factor in how your portfolio performs. Once you have considered all of the risks and benefits of the different types of risk management, you can be confident that you will be able to make an investment decision that will not adversely affect your overall financial portfolio.
As a general rule, the riskiest thing that you can do with your money is to put it in a high-risk investment product. The exception to this rule is if you are certain that you can manage the risk without putting yourself at extreme personal or business risk. In that case you should consider choosing lower risk management products. The more you know about risk management and the products that are available to you the easier it will be for you to determine what is pure risk and what is something that only you and your friends know about. As you become more educated about the risk you will find that you will be able to make sound investment decisions more often. The knowledge that you gain about risk will help you make better choices throughout your investment life.