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Key Terms

  1. Risk Tolerance: An investor's ability and willingness to endure fluctuations in the value of their investments without making impulsive decisions.

  2. Diversification: The strategy of spreading investments across different asset classes or securities to reduce risk exposure.

  3. Asset Allocation: The distribution of investments among different asset classes, such as stocks, bonds, and cash, to achieve a desired risk-return profile.

  4. Volatility: The degree of variation of a trading price series over time, indicating the level of risk associated with an investment.

  5. Beta: A measure of a security's risk in relation to the market, helping investors assess the asset's sensitivity to market movements.

  6. Standard Deviation: A statistical measure of the dispersion of returns for a given security or market index, indicating the level of risk.

  7. Risk Premium: The potential return on an investment in excess of the risk-free rate, compensating investors for taking on additional risk.

  8. Sharpe Ratio: A measure of the risk-adjusted performance of an investment, considering both the return and the volatility.

  9. Hedging: A strategy to reduce risk by taking offsetting positions that will minimize potential losses.

  10. Liquidity Risk: The risk associated with the ease of buying or selling an investment without causing a significant change in its price.

  11. Credit Risk: The risk that the issuer of a bond or other debt security may default on interest or principal payments.

  12. Market Risk: The risk that the entire market, or a particular segment of it, will decline in value.

  13. Systemic Risk: The risk that events outside an individual's control, such as economic downturns or financial crises, will impact the entire market.

  14. Country Risk: The risk associated with investing in a particular country, including political instability, economic conditions, and regulatory changes.

  15. Leverage: The use of borrowed funds to amplify potential returns, but also increasing the potential for larger losses.

  16. Downside Risk: The potential loss an investor might incur if the value of an investment decreases.

  17. Value at Risk (VaR): A statistical measure of the maximum potential loss of an investment portfolio within a specified confidence interval.

  18. Tail Risk: The risk of extreme and unexpected events that deviate significantly from the normal distribution of returns.

  19. Counterparty Risk: The risk that the party on the other side of a financial transaction may default on its obligations.

  20. Mitigation: The process of reducing the severity or impact of potential risks through various risk management strategies.

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