Understanding the Risks and Rewards of Investing You\'ve heard that investing ca
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Understanding the Risks and Rewards of Investing You've heard that investing can be risky, but what exactly are the risks? Why do some investments grow while others fail? The following examples demonstrate some of the potential pitfalls your investments might suffer. For each of the following, indicate which type of investment risk is being described. Investment Primary Risk Real estate can be a valuable investment in times of price inflation, the higher the price level, the greater the value of the property. If the general price level declines, however, these investments can lose significant value. GrainsAGo is a company that distributes cakes and breads to major grocery stores across the country. A headline science news story points out that in the course of human evolution, only recently did humans begin to eat processed grains, and our bodies may not be well adapted to processing them. A restaurant chain recently issued $1,000,000 worth of new stock shares, increasing it's debt obligations in hopes of financing a new restaurant location. The construction of the new store ended up taking twice as long as anticipated, thus forestalling the expected increases in revenue. As a result, the company is having difficulty making the interest payments on its outstanding debtExplanation / Answer
1) Purchasing power risk: Also called as inflation risk, risk arises from the decline in value of securities due to inflation. In this case the value of real estate investment depends on price inflation.Higher the price level,the greater the value of property. If the general price level declines, these investment can lose significant value.
2) Market risk: Risk that investor experiences losses due to factors that affect the overall performance of the markets as a whole.
3) Financial risk: Financial risk is the risk that shareholders will lose money when they invest in a levered company and company is unable to meet its financial obligations.
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