There is no distinct definition for risks. However, some basic statistics define a particular risk. In portfolios, risks are basically of three types:
It is the risk associated with the chance of losses in the sustained capital over a specific amount of investment.
This is the type of risk in investment portfolio associated with the low rate investments.
Reinvestment risk exists when an investor fails to achieve his desired returns in a sufficient time frame.
It is the risk associated with negative inflation returns, where the investors start losing their purchasing power.
Importance of capital risk management
There are different classes if an asset and each asset class have its exposure or a level of protection that it provides to an investor from different types of risks associated with them. All the types of risks associated with varying sets of investments have some inherent tradeoffs. In most of the cases, having protection from a kind of risk, for example, Capital risk can increase an investor’s exposure to the other two types of threats and vice versa. The level of each kind of risk associated with the investments increases with some changing external factors.
Similarly, those stocks that have minimum inflation risk have a bit more reinvestment rate risks and high capital risks associated with them. Whatever the risk management you are dealing with, you have to make sure that the administration should focus on all the present risks which each investment. Proper risk management also protects one kind of danger from the other, and it also focuses on understanding the levels of each type of risk within different economies and market conditions.
Long term investors, on the contrary, are those who focus on growth-based investments for managing their investment portfolios in a better way. Capital risk can manage by assessing the current economic and market conditions for investments. All portfolios that have long term goals should base on growth-based assets, and they must provide high allocations for preventing such type of risks.