Risks can be classified as financial risk and business or operating risk. For portfolio investors, risks can be categorized into systematic and unsystematic risks (Ross et al, 2010). While unsystematic or diversifiable risks are security specific, systematic risks cannot be diversified and it refers to the risk of the aggregate broader market. Security specific risk is captured by its beta, which is a measure of the relative riskiness of the security in contrast to the broader market. Other types of financial risks include (Types of Financial Risks, 2011):
- Liquidity Risk: This refers to the risk that the selected security would not be transacted easily in the market to obtain cash. This type of risk is predominant in the market for real estate investments and private equity. In an illiquid market, it is difficult to find a buyer when the party wants to dispose off his/her investments in order to obtain cash. At the same time, finding a genuine seller is also difficult when the investor wants to buy the asset or the security. Thus this risk is a direct function of the nature of the asset and the credibility of the buyer and the seller.