Help, I m Rich!: Your Compass to a Value-Adding Private Banking Experience

Chapter 4 Risks? What Risks?

Managing an investment portfolio means managing risks. The investment risks that need to be taken into consideration are:

• Market risk
• Business risk
• Liquidity risk
• Country risk
• Inflation risk

Professional money managers typically use six strategies to manage these risks:

1. Risk–return profiling
2. The formulation of a macroeconomic and geopolitical view
3. Company research
4. Hedging
5. Diversification
6. Risk indicating formulas (volatility and Value at Risk)

So far we have talked about risks as if it is obvious what these risks are and as if the difference between them is obvious. To fully appreciate the investment process, it is important to have an understanding of the risks that threaten the performance of your investment portfolio. It is so easy to talk about managing risk, but which are the risks that need to be managed? What are the risks we are precisely talking about? And how can we manage or mitigate these risks?

Common Investment Risks

The five main risks that an investment specialist has to take into account while constructing and managing a portfolio are (in random order):

1. Market risk. Market risk is the risk to incur losses in invested positions as a result of a movement in market prices. It is a very broad risk category that can be subdivided into a number of more specific market risks, such as:
   • Equity risk. This is the risk that the prices of the stocks in your portfolio depreciate.
   • Currency risk. This is the risk associated with investments ...