Business Cycle Risk
Business cycle risk represents the risk of a general economic development diverging from the investment decision. The general economic cycle is characterized by four phases: the expansionary phase, the boom, the downturn, and the depression, and has a direct impact on the development of security prices. Depending on the economic cycle, the proportion of riskier assets varies considerably.
Business cycle risk characterizes the danger of losses due to a misjudgment of economic development. The resulting outcome of making an investment at the wrong time or holding securities during an unfavorable economic phase has a significant impact on portfolio performance.
Inflation Risk
Inflation risk refers to the risk of losing wealth due to a decline in the value of money. If inflation exceeds the nominal monetary interest rate, the client suffers a loss of purchasing power. The nominal interest rate is composed of the real interest rate and inflation. It is therefore essential to consider the real interest rate, which is calculated as the nominal interest rate minus the inflation rate.
Currency Risk
Investments outside the home currency carry the risk of unfavorable exchange rate development. The currency in which the security is traded plays only a minor role here. The development of the exchange rate depends on several short-term and long-term factors.
Volatility
Security prices are subject to sometimes considerable fluctuations over time. The range of price fluctuations is usually referred to as volatility and expresses how much a security price deviates on average from the mean. Volatility is a common risk measure. The higher the volatility, the riskier the financial instrument is considered to be.
Country Risk
Investments outside the domestic market are subject to an increased risk of influence from the administration ruling there. This can affect general capital movements, as well as direct influence on exchange rates or the transferability of the currency. Country risk describes, for example, the case where, due to a lack of willingness to transfer by a country of domicile, the debtor from abroad does not meet their financial obligations despite having liquid funds. The reasons for active intervention in financial markets are diverse: foreign exchange shortages, conflicts, etc.
Liquidity Risk
Liquidity risk refers to the danger of being able to sell financial instruments only at non-market prices. If the interests of buyers and sellers diverge significantly, a security is considered illiquid. Orders can therefore be executed only on very unfavorable terms, or not at all.
Psychological Market Risk
In addition to fundamental risks, there is the danger of irrationality among market participants in the capital markets. Investors do not (always) act rationally. As a result, irrational factors can have a significant impact on the development of security prices.
Tax Risks
Tax risk describes the risk that tax treatment can have a significant impact on the return on an investment.
Information Risk
Missing, incomplete, or incorrect information can lead to erroneous investment decisions.
Risk of Custody of Securities Abroad
If a security is acquired abroad, it is held by a third-party bank abroad selected by the custodian bank. The custody of a security abroad entails several risks: higher costs, foreign legal and tax regulations, etc. If securities are held abroad, access to the securities may be restricted or even excluded, especially in the event of insolvency proceedings or other enforcement measures against the custodian. See also “Country Risk”.