The essence and classification of investment risk

Автор работы: Пользователь скрыл имя, 28 Апреля 2013 в 10:16, курсовая работа

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From the standpoint of monetary theory of money, the funds can be spent on consumption or saving. Simple savings withdraws funds from circulation and creates the preconditions for crisis management. Investing involves savings in the same turn. It can occur either directly or indirectly (temporarily available funds on deposit in the bank, which has already invested himself).


1) Concept of investment activity and its risks
1.1 Essence and classification of investment risks
1.2 Types of investment risks
2) Investment activity on example of…
2.1 General description of the company
2.2 Analysis of investment activity
3) Ways of preventing and controlling of investment risk

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2. Economic risks associated with uncertainties that affect the economic component of investment activity in the country and on the subject of economic activities in the implementation of the investment project within the target set to achieve general economic equilibrium of the system and accelerate the growth of its gross domestic product by production of competitive products on the world market, the choice rational combination of forms, and the industries of the state anti-cyclical measures to regulate the economy, etc. Economic risk includes the following uncertainties: the state of the economy, the government pursued economic budgetary, financial, investment and tax policy, market and investment conditions, cyclical development of the economy and the economic cycle, government regulation of the economy, and the dependence of the national economy, the possible failure to comply with the state's obligations (partial or total expropriation of private capital, various defaults, termination of contracts and other financial turmoil), etc.

3. Political risks associated with the following uncertainties that affect the political component in case of investment: the election of various levels, changes in the political situation, changes in the policy implemented by the government, the political pressure, administrative restriction of investment; foreign political pressure on the government, freedom of speech; separatism, the deterioration of relations between states, which can badly affect the operation of joint ventures, etc.

4. Social risks associated with uncertainties that affect the social component of investment, such as: social tensions; strike, the implementation of social programs. The social component is due to the desire of individuals to create social bonds, to help each other, abide by the mutual obligations, the role they play in society, work relationships, moral and material incentives, existing and potential conflicts and traditions, etc. The limiting case of social risk is a personal risk that is associated with the inability to accurately predict the behavior of individuals in the course of their activities and due to the human factor.

5. Environmental risks associated with the following uncertainties that affect the state of the environment in the state, the region and influencing the activity of the invested facilities: environmental pollution, radiation environment, environmental disaster, environmental programs and the environmental movement as "Green peace", etc. Environmental risks are divided into the following types:

• Technological risks related to emergencies related to the following factors: man-made disasters in enterprises, causing contamination of the environment with radioactive, toxic and other harmful substances;

• Climatic risks are associated with the following uncertainties that affect the implementation of the investment project: the geographical location of the facility; natural disasters (floods, earthquakes, storms, etc.), climate disasters; specific climatic conditions (dry, continental, mountain, sea and climate, etc.), the presence of minerals, forests, water resources, etc;

• Social and domestic risks are associated with the following uncertainties that affect the implementation of the investment project: The incidence of human and animal infectious diseases, massive spread of plant pests; anonymous calls on the mining of various objects, etc.

6. Legislative and legal risks associated with the following uncertainties that affect the implementation of the investment project: changes in applicable laws; contradictory, incomplete, incomplete, inadequate legal and regulatory framework, legal guarantees, the lack of independence of the judiciary and arbitration; incompetence or lobbying for the interests of individual groups of persons with adoption of legislative acts; inadequacy of the state tax system, etc.

According to the forms of manifestation investment risks are subdivided into:

1. Risks of real investment, which may be associated with the following factors:

• disruptions in the supply of materials and equipment;

• the rise in prices of capital goods;

• choice is not qualified or unscrupulous contractor and other factors that inhibit the entry into operation or reducing income during operation.

2. Risks of financial investment that is associated with the following factors:

• ill-considered choice of financial instruments;

• unexpected changes in investment conditions, etc.

According to the sources of investment risks are divided into:

1. Systematic (market, not diversifiable) risk arises for all participants of investment activity and all forms of investment. Determined by the change of stages of the economic cycle, the level of effective demand, changes in tax laws and other factors, which influence the choice of the investor of the investment object cannot.

2. Unsystematic (specific, diversifiable) risk, which is characteristic of a particular object or investment activity for a particular investor. It can be associated with the company's management staff competencies; increasing competition in this segment of the market; unsustainable capital structure and other unsystematic risk can be prevented through diversification projects, the choice of optimal or efficient portfolio management of the project

Investment activity is characterized by a number of investment risks classification is by type can be:

• Inflation risk - the probability of losses that may be incurred by the subject of the economy as a result of the depreciation of the real value of the investment, the loss of assets (in the form of investment) of the real cost, while maintaining or increasing their nominal value as well as the depreciation of the expected income and profits subject of the economy by investing in conditions of uncontrolled advance the rate of inflation over the pace of growth in investment income.

• deflationary risk - the probability of losses that may be incurred by the subject of the economy as a result of a decrease in the money supply due to the withdrawal of excess funds, including by raising taxes, accounting, interest rates, budget cuts, growth, savings, etc.

• Market risk - the probability of changes in the value of assets as a result of fluctuations in interest rates, exchange rates, stock price and bond prices of the goods that are the subject of investing. Varieties of market risk are, in particular foreign exchange and interest rate risk

• Operational investment risk - the probability of investment losses due to technical errors during operations; due to intentional and unintentional actions of personnel; emergencies; failures of information systems, equipment and computer technology, security breaches, etc.

• Functional investment risk - the probability of investment losses as a result of errors in the formation and management of the investment portfolio of financial instruments.

• Selective investment risk - the probability of a wrong choice of the investee compared with other options.

• Liquidity risk - the probability of losses caused by the failure to release without loss of investment funds in the required amount in a relatively short period of time due to the state of the market situation. Also under the Liquidity risk is the probability of a shortage of funds to meet obligations to contractors.

• Credit risk investment manifests itself if the investment is made with borrowed funds and represents the probability that the value of assets or loss assets as a result of the original quality of the borrower, the investor fulfill its contractual obligations as a whole and the individual items in accordance with the terms of the credit agreement.

• Country risk - the probability of losses in connection with investments in facilities under the jurisdiction of the country with an unstable social and economic status.

• The risk of loss of profits - the likelihood of indirect (side) financial loss (non-receipt or business profits) as a result of non-implementation of an intervention, such as insurance.

It should be noted that this classification is somewhat arbitrary, since a clear distinction between different types of investment risk is difficult. A number of investment risks are interrelated (correlated with each other), a change in one of them cause changes in another, which affects investment performance.


1.2 Types of investment risks

It is well known that the implementation of the majority of investment projects on any stock market involves substantial risk of loss of some or even all of the capital invested, and the risk of loss is higher, the higher the level of expected investment income. In this regard, it is essential to have a clear understanding of the risks of the system, which can be called investment risks, and which incorporates all of the risks inherent in investing activities in general. Types of investment risks are manifold. All investment risks can be subdivided into systemic and non-systemic, depending on how a wide range of capital market instruments in danger of exposure in each case.


On spheres of manifestation:



Risks associated with changes in economic factors. Since the investment activities carried out in the economic sphere, it is most exposed to economic risk


various types of administrative constraints arising from investment activities related to the ongoing changes in state policy


the risk of strikes of workers exposed invested enterprises unplanned social programs and other similar types of risks


Risk of a variety of environmental disasters and disasters (floods, fires, etc.), negatively affecting the activity of the invested facilities.

Other types

These include racketeering, embezzlement, fraud on the part of investment or business partners, etc.


By forms of investment:


Real investment

Financial investment

This risk is associated with the unfortunate choice of the location of the object under construction, disruptions in the supply of construction materials and equipment, a significant increase in prices of capital goods; choice unqualified or unscrupulous contractor and other factors, delaying the commissioning of the investee or reducing income (profit) during its operation

This risk is associated with ill-considered selection of financial instruments for investment, financial difficulties or bankruptcy of certain issuers, unforeseen changes in the terms of investment, direct deception of investors, etc.


According to sources, the occurrence has two main types of risk:


Systematic (market risk)

Non-systematic (specific risk)

This type of risk arises for all the participants of the investment activities and forms of investment. It is determined by the change of the stages of the business cycle development and market development cycles of the investment market, significant changes in tax laws in the field of investment and other similar factors, which affect the investor when choosing investment targets is not possible.

This type of risk is inherent in a particular investment project or activity of a particular investor. It can be associated with a non-qualified management company (firm) - the object of investment, increased competition in some segments of the investment market, irrational structure of the invested funds, and other similar factors, the negative effects of which can be largely prevented through effective management of the investment process.



In some sources also highlight the following risks:

-risks associated with the industry production - an investment in the production of consumer goods are on average less risky than in the production of the equipment;

-management risk, i.e. associated with the quality of the management team in the company;

-timing risk (the more time investing in the company, the greater the risk);

-commercial risk (associated with the development indicators of the company and the period of its existence).

Since investment risk refers to the probability of unforeseen financial loss when evaluating its level is defined as the deviation of the expected return on investment from the average or estimated value. Therefore, the assessment of investment risk is always associated with the estimate of expected income and losses. However, the assessment of risk is a subjective process. No matter how many there were mathematical models for calculating the risk curve and its exact value, in each case, the investor must itself determine the risk of investment in the enterprise.

Investment - is not so much investment in the project, but in the people who are able to realize this project. Investments precede long-term studies, and they are accompanied by constant monitoring of the state of the enterprise, in the initial stages is determined by the probability of all possible risks.

Investment efficiency depends on many factors, including - from risk factor. Investment decisions are generally made under conditions of uncertainty. By uncertainty understand incomplete or inaccurate information on the conditions of the project, including the costs and results (profit or loss). The uncertainty associated with the possibility of the project in adverse situations and their consequences, there is a risk.












The types of risks include:


inflation risk

The risk of loss that may be incurred by the investor as a result of the depreciation of the real value of investments (assets) or anticipated revenues and profits from the uncontrolled growth of inflation;

market risk

Arise as a result of negative changes in the value of assets due to fluctuations in interest rates, exchange rates, stock prices, and bond. This risk is usually attributed to the uncontrollable, because his nature is associated with many factors (changes in customs legislation, taxation, the actions of competitors, inflation, competition, etc.;

operational risk investment

Associated with the probability of investment losses due to technical errors, which lead to accidents and delays the process equipment, the appearance of the marriage;

functional risk

The probability of which is related to the errors committed in the formation and management of a portfolio of financial instruments;

selective investment risk

Wrong choice of species related investments made

credit risk

It is related to the probability of failure to the borrower or guarantor to fulfill its obligation to pay interest on the loan. It includes: banking (direct) investment credit risk, the risk of deposit, loan default risk (the risk of default by the borrower ads);

construction risk

Associated with errors in the construction documents or bankruptcy of participants (subcontractors). The increase in value of the property may result in denial of the investor of the construction;

risk of exceeding the cost

Due to changes in the original plan of the project costs. Typically, for this purpose provided contingencies.

risks associated with the operation of "enterprise" (production risk).

There, because of the use of new technology. Lenders take most of the risk in the event that they are amenable to calculation and are manageable;

the financial risks of projects

Associated with increased costs and, accordingly, with a reduction in viability of the project, reducing dividends and additional borrowing;

risks associated with the market (the risks of implementation)

May be the consequence of an erroneous assessment of the market (its volume, segmentation), obsolescence of products or inconsistencies of its consumer properties. This kind of risk can be restricted. Eliminate it entirely possible through a detailed market research.


When making investment decisions should distinguish types of risks: on the field of manifestation;-scale manifestations and their impact on the subjects of investment activities, by type of losses from risks as possible forecasting and sources of origin, degree of control, diversification opportunities, possible consequences, the ability of insurance. It is necessary to take into account all hazards, conduct risk analyzes and their consequences, and on the basis of these data to develop a strategy for risk management and on that basis - Measures to prevent and reduce risk.

























3) Ways of preventing and controlling of investment risk


Risk management practices are very diverse. From the current practice at the moment quite clearly that developed quite clear preference for risk management. The presence of such preferences is due first of all, the nature of the economic development of the state and, as a consequence, the groups considered risks.

However, despite the differences in preferences, it should be noted that the development of economic relations is conducive to the implementation of the Western experience and, as a consequence, the convergence of approaches to management and the study of risk.

Means permit them to avoid the risks are, hold, transfer, reduced extent.

Risk avoidance is simply an evasion activities associated with risk. However, to avoid the risk of the investor often means giving up profits.

Retention of risk - the risk of avoiding for the investor, i.e. his responsibility. Thus, the investor, investing venture capital in advance’s sure he can own funds to cover the possible loss of venture capital.

Transferring risk means that the investor for the risk of betraying the responsibility to someone else, such as an insurance company.

To reduce the risk applied various techniques. The most common are:

- Diversification;

- Limitation;

- Self-insurance;

- Insurance.

Diversification is the process of allocation of invested funds between different objects of capital investments that are not directly related, in order to reduce the risk and loss of income.

Diversification allows you to avoid some of the risk in the allocation of capital between the various activities.

Limitation - is setting a limit, i.e. separate amounts for expenses, sales, loans, etc. Limitation is an important technique to reduce the risk and applied by banks when granting loans, signing a contract for an overdraft etc. It is used by business entities in the sale of goods on credit, loans, determining the amount of capital investment, etc.

Self-insurance means that the entrepreneur prefers to insure himself than to buy insurance with an insurance company. Thus, it saves on the cost of capital for insurance. Self-insurance is a decentralized form of creating natural and financial insurance (reserve) funds directly to the business entity, especially those whose activities are subject to the risk. Self-insurance is logical when the value of the insured property is relatively small in comparison with property and financial parameters of the business. For example, a large corporation is impractical through an insurance company to insure their equipment from the fire, which is set in a small, rented her room. Self-insurance also makes sense when the probability of loss is extremely small when the company owns a large number of similar properties.

The essence of insurance is expressed in the fact that the investor is willing to give up the revenue side, to avoid the risk, i.e. he is willing to pay for reducing the risk to zero.

The tables are ways to reduce the negative effects of the different types of risk that may be faced entrepreneur.


The different types of risk that are not related to insurance:


The type of risk

A method of reducing the negative effects

Commercial risk

The correct definition of an acceptable level the ratio of financial ratios. The correct choice of ways to increase the projected return on investment in the project

The risk of sub-optimal allocation of resources

Clear and correct definition of priorities in the allocation of resources depending on their availability. The correct and accurate market research to determine the exact number of manufactured products. Using of matrix method.

Economic fluctuations and changes in customer taste

Effective forecasting and planning

Actions of competitors

Active work on the study and prediction of possible actions of competitors and their integration into the marketing and production activities

The discontent of workers, which can lead to their care or strikes

Well-designed social and economic programs for employees, taking into account their needs and requests, problems of motivation, creating a favorable psychological climate, etc.

The financial risk associated with the passivity of the capital, while placing a lot of money in a project, etc.

Proper financial management, its temporary placement of passive funds in unprofitable projects or providing favorable loans. The main thing is that the capital was not lying "dead weight" and worked. The transfer of the risk of other companies by connecting them to participate in the financing of high-value and high-risk projects, the use of venture capital

Mistakes of managers

More extensive monitoring system and the verification, acquitted of duplication, especially in the critical phases of the business hub, when the error manager can be very expensive. In this connection it is useful simulation of the possible financial consequences of errors when you are overcrowding the most expensive projects.


A more thorough forecasting. Hedging and other ways to mitigate risk.

Changes in prices, demand, profit levels

A thorough inspection of all the arguments "for" and "against." Using computer modeling to more accurately render options in the case of particularly complex projects

The risk of incorrectly selected project

It is not always possible to predict and impossible to insure. But it must be considered as force majeure, that is, to have some kind of life and psychological schemes

Unforeseen political events that have serious consequences for the business

This should be considered as force majeure

National and ethnic unrest

This can be accounted for and anticipate. To avoid the worst effects by using the proper operation of public relations, taking into account national and psychological conditions in the area

Unforeseen government regulations (changes in laws, prices, taxes, etc.)

In Russia this is particularly important. So it is important to study the regulations for the Basic Law, as well as closely monitor the situation. Absolutely unexpected decisions do not happen. They are prepared in advance of public opinion after treatment

The risk of destruction of property the value of which is small compared with the financial parameters of the whole company

Self-insurance by domestic measures

The risk of destruction of a large number of similar assets



The practical application of these principles means that it is always necessary to calculate the maximum possible loss on this kind of risk, then compare it with the total capital of the enterprise, subjected to this risk, and then compare all the possible loss with a total volume of its own financial resources. Only the last step may determine not lead to the risk to the bankruptcy of the enterprise.

The choice of optimal policies for risk reduction is solved in the framework of microeconomic theory. The corresponding result reads as follows: optimal risk management policy should be such that the marginal cost of implementing this policy consistent with a limit of utility delivered its application.

However, because of the significant information requirements, this principle is difficult to implement in practice. In fact, simple criteria are applied, for example, the criterion of the minimum cost of measures to reduce risk to an acceptable level.

In specific cases, the choice of the means to reduce the risk depends on the capabilities of its predictions. Thus, the well-known, common risks can be reduced with the help of specially developed preventive measures. For example, the risk of loss of the company's assets as a result of theft can be reduced by setting the alarm in warehouses, to improve the current system of accounting and control the storage and use of wealth.

Anticipated but poorly controlled risks can be reduced through diversification of production and the use of backup supply system resources.

Each of these tools has a lower risk of specific advantages and disadvantages. Generally use some combination of these instruments "suppression" of the risks. When choosing a means of reducing the risk of use of special schemes like the below.


 Ways of preventing of investment risk.

After all of the risks identified in the investment project and the analysis, it is necessary to give advice on risk reduction by stages of the project. The basic principle of the mechanism to reduce the investment risk is the complexity of the nature of their impact and economic feasibility. The results of risk analysis and assessment can develop evidence-based activities to reduce them, as follows:

• the allocation of risk between the parties to the project (the laying of the risks to subcontractors);

• reservation of funds for unforeseen expenses;

• reducing risks of financing;

• insurance industry risk;

• insurance of the investment project.

• A system of guarantees - to provide state guarantees, banks, investment companies, etc.

Each of the measures aimed at reducing the likelihood of adverse events, their similarities and, as a consequence, to reduce the additional costs caused by the impact of unfavorable factors.

The distribution of risk is in the process of drawing up the program of the project and the contract documents. At the conclusion of the contract you can do the following: identify opportunities for each participant in the prevention of risk events and their consequences, to evaluate the amount of risk that takes each member of the project, to include in the contract a condition of reasonable compensation for risk, achieve compliance with the parity in the distribution of risk and income among the project participants.

The greater the amount of risk borne by the project participant, the higher should be the reward.

Achieve a fair distribution of risk is not so easy, because the investor (customer) always tends to reduce the cost of the project, and the contractor - to increase. Bidding is usually carried out in accordance with the Pareto principle: "There is no change in the mutual agreement of the two sides. It can`t be both beneficial to both parties."

In the allocation of the risk alleged participants in the project are trying to get information about each other, to assess the financial condition of the counterparty obligation, to enlist the support of commercial structures.

Creation of reserve funds is one of the main ways to compensate for unexpected expenses resulting from the possible appreciation of the work (cost inflation), and the guarantee of the project on schedule.

These loans are as follows:

• assessed the possible impact of adverse events and resulting costs;

• Reserves are distributed by type of work and costs or, depending on the structure of the contractual relationship;

• Determine how to use the reserve for contingencies upon the occurrence of a risk event.

If payment contingencies require less money than was allocated from the reserve, the balance is returned to the reserve fund of the project.

Part of the reserve should be at the disposal of the project manager to resolve problems arising in the course of the work. At the same time must maintain a positive balance of inflow and outflow of funds at each stage of the calculation.

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