LO5 Risks Affecting Investment Performance
Liquidity, access, shortfall, volatility, currency, inflation, credit, default, interest-rate, gearing, systematic, institutional, fraud, counterparty and bail-in risks.
How to prepare for R02
Match the annual edition to your exam date, learn product structures and risk relationships, then practise calculation, analysis and client-application decisions.
Core concepts
Concept 1
Risk is multidimensional: volatility does not capture liquidity, access, shortfall, inflation, credit, counterparty, operational or fraud exposure.
Exam cue: Name the specific risk, source, transmission path, affected cash flow or value and time horizon.
Concept 2
Interest-rate changes affect borrowing costs, discount rates and fixed-interest prices; gearing amplifies gains and losses and may force action when values fall.
Exam cue: Distinguish inability to sell, inability to access on time, loss on sale and failure of a counterparty.
Concept 3
Systematic risks affect broad markets and resist diversification, while non-systematic risks can be reduced but not necessarily eliminated through appropriate diversification.
Exam cue: For gearing, compare asset movement with the fixed liability and the investor's residual equity.
Risk pitfalls and guardrails
Using volatility as a complete measure of client risk.
Guardrail: Do not mix asset and wrapper, nominal and real, price and yield, willingness and capacity, or benchmark return with investor experience.
Treating liquidity and creditworthiness as the same issue.
Guardrail: Do not mix asset and wrapper, nominal and real, price and yield, willingness and capacity, or benchmark return with investor experience.
Assuming diversification protects against inflation, systemic shocks or every counterparty failure.
Guardrail: Do not mix asset and wrapper, nominal and real, price and yield, willingness and capacity, or benchmark return with investor experience.
Memory anchors
Liquidity vs Access
Liquidity concerns conversion to cash at a fair price; access concerns when and how funds can be reached.
Shortfall
Shortfall risk is the chance that the investment will not meet the required future amount or income.
Credit and Default
Credit risk reflects deterioration or failure of an obligor to meet promised payments.
Rate Risk
Longer and lower-coupon fixed cash flows are generally more sensitive to interest-rate changes.
Gearing Amplifies
Debt magnifies changes in the investor's residual equity and can introduce forced-sale risk.
Systematic vs Specific
Broad market risk remains after diversification; issuer-specific risk can often be reduced by spreading exposure.
Checkpoint rule
Do the check-up only after you can summarize each concept in one sentence and identify one dangerous pitfall from memory.
Knowledge Check (after reading)
Short check-up to confirm understanding of this module.
Check-up Questions
A fund cannot sell an unlisted holding near its stated value. Which risk is this?
A pension product prohibits withdrawal until a condition is met. This is principally
Answer all questions to submit.
Next step personalized recommendations
Continue learning
Move forward only after this module is stable.
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