Risk Management in Portfolios Flashcards

What is 'concentration risk' in a portfolio?

Answer: Risk from having too large a position in a single security or sector

Concentration risk arises when a portfolio has too much exposure to a single investment, sector, or geographic region.

What is 'liquidity risk' in portfolio management?

Answer: The risk of not being able to sell an asset quickly at fair value

Liquidity risk is the possibility that an investment cannot be sold quickly enough or at a fair price when needed.

What is 'credit risk' in the context of bond investing?

Answer: The risk that a bond issuer will default on payments

Credit risk is the probability that a bond issuer will fail to make required interest or principal payments.

Which risk management technique involves setting a predetermined price to automatically sell a position?

Answer: Stop-loss order

A stop-loss order automatically sells a security when its price falls to a predetermined level, limiting downside losses.

What is 'inflation risk' (purchasing power risk) in a portfolio?

Answer: The risk that returns will not keep pace with inflation

Inflation risk is the danger that investment returns will be eroded by inflation, reducing the portfolio's real purchasing power.

How does geographic diversification help manage portfolio risk?

Answer: It reduces exposure to any single country's economic or political events

Geographic diversification reduces the impact of country-specific economic downturns, political instability, or regulatory changes on the overall portfolio.