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Risky and risk–free assets - what is it: the essence and difference

Risky and risk–free assets - what is it: the essence and difference

One often hears about investments in risky and risk-free assets.

Assets are any tools for investing monetary funds, in order to increase them or at least preserve.

There are quite a lot of investment tools today – currency, bank deposits, real estate, raw materials, funds (stocks, bonds, speculative instruments – options, futures, forwards, etc.), crypto, NFT, ETF, business, etc.

Any assets are always associated with the risk of drop in their price (or even loss) due to any internal (inflation, economic decline) and external (wars, sanctions) factors.

Depending on the degree of probability of execution of a particular risk, which may negatively affect the initial value of the initial asset and distinguishes them - what is risky and what is risk-free.

It is impossible to say exactly which risk category a particular type of asset belongs to with 100% certainty. But there are some types where the guarantee of preserving their original value has been confirmed for years.

Risk-free assets include:

  • government bonds
  • shares of stable companies
  • bank deposits
  • gold
  • still American dollar

For example, you invested money in a bank deposit of $1000 in order to increase your initial capital by rate, at least equal to the annual inflation rate of 5%. That is, the bank, and in fact the state (if the share in the bank's charter is state-owned) guarantees you that in a year it will return you the initial amount of investments + $ 50 on top. In total, we invested $ 1000 and withdrew $ 1050.

The probability of fulfilling the risk (that in a year the amount of investments will be lower than the initial one) is minimal, but there is. This is related to economics of the state, the bank (because it's all connected), investment guarantees (honesty and decency), the country's gold reserves, etc.

The value of risky assets is always subject to high volatility (significant price hikes), even for a short period of time (up to 1 year), due to the influence of fundamental factors on their value (laws, dollar, oil, inflation, etc.).

Risky assets include:

For example, you bought shares of a COVID vaccine company for $1,000. A year later, due to a decrease in demand for its products, the company's capitalization decreases, and the share price drops 4 times. In total, we invested $ 1000 and withdrew $ 250.

The probability of fulfilling the risk (that in a year the amount of investments will be lower than the initial one) is high, due to the unpredictability of the epidemiological situation in the world.

Similarly with crypta, where the risks are more related degrees with unpredictability regarding the legislative regulation of this area.

Risky assets attract investors, to a greater extent, by their profitability, which is much higher than that of risk-free ones, but the risk level is also appropriate.

Usually, in conditions of some economic uncertainties and shocks, investors prefer to move from risk to a "safe haven", changing risky assets to risk-free assets, which reduces the loss-making of transactions and gives them certain guarantees in maintaining their original value.

Risky and risk-free assets – what is it: the essence and the difference is Something like That!

автор - Михаленко Р.
M R. Автор - kaktotak.by Specialization: financial and economic design - modeling of business, investment projects of the real sector, analysis and evaluation of efficiency, optimization of the management decision system.

A wide range of web-based competencies for solving business problems.

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