Page 65 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes The three major forms of non-insurance risk transfer are by contract, hedging, and, for
business risks, by incorporating.

3.10 Keywords

Avoidance: Avoidance is the elimination of risk.
Equity Risk: Equity risk is the risk that one’s investments will depreciate because of stock
market dynamics causing one to lose money.

Financial Risk: Financial risk is often defined as the unexpected variability or volatility of
returns and thus includes both potential worse-than-expected as well as better-than-expected
returns.

Hedging: Hedging is a method of reducing portfolio risk or any business risks involving future
transactions.
Investment: It refers to a commitment of funds to one or more assets that will be held over some
future time period.
Investment Risk: Investment risk is deviation from an expected outcome.
Investor: A person who buys or sells securities for his or her own account or the account of
others.
Passive Risk Retention: Passive risk retention is retaining risk because the risk is unknown or
because the risk taker either does not know the risk or considers it a lesser risk than it actually
is.

Portfolio: A collection or combination of financial assets (or securities) for investment purpose.
Pure Risk: A pure risk is one in which there are only the possibilities of loss or no loss (earthquake).
Risk Retention: Risk retention, as active retention or risk assumption, is handling the unavoidable
or unavoided risk internally, either because insurance cannot be purchased for the risk, because
it costs too much, or because it is much more cost-effective.

3.11 Review Questions

1. Briefly explain the concept of risk with definitions.

2. What are the different types of risk?
3. Distinguish between Risk and Un-certainty.
4. What are the various statistical available for measurement of risk?
5. Explain in detail the five major methods of risk handling.
6. What is Pure Risk? What are its types?

7. What is the difference between internal risk and external risk?
8. How is insurance an investment tool? Discuss.
9. What are the techniques available to minimize risks in investments? Explain with examples.

10. What is the difference between systematic and unsystematic risk?
11. Explain Modern Portfolio theory with the help of suitable examples.

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