Financial Risk refers to the possibility of losing money or facing adverse financial consequences due to various factors, such as market fluctuations, credit issues, operational failures, or liquidity challenges. This risk occurs when an investment’s actual return differs from the expected return, which may lead to potential losses for investors or financial institutions.
The main types of financial risk include market risk (the risk of losses due to changes in market prices), credit risk (the risk of default by borrowers), liquidity risk (the risk of not being able to sell an asset quickly without a significant price concession), and operational risk (the risk of loss resulting from inadequate or failed internal processes, people, and systems).
Organizations and investors use various strategies, such as diversification, hedging, and risk management techniques, to mitigate financial risk and safeguard their investments. Understanding financial risk is crucial for making informed investment decisions and maintaining financial stability.
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