Risk of Investment 投資風險

Meaning of Risk 風險定義

Investment commits money now in the hope of obtaining greater value later. Risk generally means the possibility of loss or injury; in investment, it means uncertainty about the investment’s value at the end of a period, with actual results potentially above or below expectations.

Investors are usually particularly concerned about downside risk: losing part or all of their original capital. Financial risk means that losses are possible and capital growth is not absolutely guaranteed; it does not mean that a loss must occur. Investment advisers should understand an investor’s risk appetite before giving investment advice.

Types of Risks 風險種類

Market risk arises from changes in market supply, demand and prices. Company risk arises from adverse developments at a particular company, such as a failed product or loss of market share. Economic risk concerns an overall economic slowdown. Distinguish market-wide influences from developments affecting an individual business and the wider economy.

Inflation risk is a loss of purchasing power when investment returns fail to keep pace with prices. Default or credit risk is a debt issuer’s inability to pay interest or repay principal. Liquidity risk is difficulty selling an investment, or having to incur substantial costs to sell it. Bank deposits can still face bank default and inflation risk.

Interest rate or price risk concerns changes in fixed-income investment prices before maturity as market interest rates change; fixed-rate bond prices generally move in the opposite direction to market rates. Reinvestment-rate risk concerns being unable to reinvest interest or maturity proceeds at the same or a higher return. Exchange or currency risk arises when an adverse exchange rate reduces the proceeds converted into the investor’s home currency.

Sovereign or political risk concerns political instability or government action that harms investments in a country. Operational risk arises from transaction processing, information systems, weak internal management or controls, or human error. It differs from market risk arising from movements in investment prices.

Risk-return Trade-off 風險與回報之間的取捨

Investors seeking higher expected returns generally have to accept greater risk, because additional expected return compensates for additional risk. The word expected matters: taking greater risk does not guarantee a higher actual return and can result in substantial losses.

A broad comparison places bank deposits, short-term debt instruments, bonds, equities and derivatives in ascending order of risk and expected return. This is a general comparison between asset classes, rather than a fixed rating for every product; derivatives can also be used to hedge risks in other positions.

Risk Reduction Techniques 減低風險的技巧

Diversification involves holding securities from different issuers, different asset classes, and investments across markets, regions or countries. Low correlation between returns matters: gains or relative strength in some investments may offset falls in others. Adding holdings can reduce specific risk but cannot eliminate market-wide risk; several shares in the same industry may provide limited diversification.

Dollar cost averaging invests a fixed amount at fixed intervals. It buys more units when prices are lower and fewer when prices are higher, reducing the risk of investing everything at an unfavourable time. Average cost per unit equals total investment divided by total units bought, rather than the simple average of purchase prices. It guarantees neither profit nor better results than a lump-sum investment.

A longer investment horizon gives investors time to wait through market fluctuations and allows compounding to work. However, the time needed for a market to recover can be very long and uncertain. Holding an investment for longer does not guarantee recovery of capital or replace diversification.

Risk Management Process 風險管理流程

For a financial intermediary, the sequence is identification, measurement, management and monitoring of risk. Identification requires a sound understanding of the business; heavy reliance on a few clients, for example, may increase credit risk. Without understanding revenue sources, transactions and the client mix, risks may be missed or misclassified.

For measurement, let pᵢ be each scenario’s probability and rᵢ its return, with probabilities totalling 1. Expected return r̄ = Σpᵢrᵢ, and volatility σ = √[Σpᵢ(rᵢ − r̄)²]. Volatility is the standard deviation of returns: a higher figure means greater variability. The Sharpe ratio equals (expected return − risk-free rate) ÷ volatility; on a comparable basis, a higher ratio indicates more excess return per unit of risk.

Value at Risk (VaR) must be read with its holding period and confidence level. A one-day 99% VaR of HK$1 million means that, under the model’s assumptions, the daily loss has a 99% probability of not exceeding that amount; it is not an absolute loss limit. Stress tests assess major market movements. Option sensitivity measures assess the effects of factors such as time, interest rates and volatility on option prices. Duration measures bond-price sensitivity to interest-rate changes.

Management requires senior management support, written policies, clear responsibilities, training and adequate resources. Risk management functions should be independent of business units, with unusual matters reported directly to senior management. Monitoring uses documented systems and regular internal or external audits to assess effectiveness and make improvements where necessary.

Financial Risk Management in Hong Kong 香港財務風險管理

The Hong Kong Monetary Authority (HKMA) supervises authorized institutions using a risk-based approach. Four elements of sound risk management are active board and senior management oversight; policies, procedures and limits; adequate risk measurement and management information systems; and internal controls with comprehensive audits. [HKMA Supervisory Policy Manual SA-1](https://brdr.hkma.gov.hk/eng/doc-ldg/spm/current/SA-1) CAMEL assesses Capital adequacy, Asset quality, Management, Earnings and Liquidity. Its overall scale runs from 1 to 5, with higher numbers indicating greater supervisory concern. [HKMA financial terms guide](https://www.hkma.gov.hk/eng/data-publications-and-research/guide-to-monetary-banking-and-financial-terms/)

The SFC regulates the securities and futures industry and directs resources towards higher risks. Diagnostic tools identify and assess risks, such as through monthly financial resources returns. Monitoring tools track risks through off-site reviews and on-site inspections. Remedial tools include disciplinary sanctions for proven misconduct and investor compensation arrangements when an intermediary defaults and causes investor losses. [SFC regulatory tools](https://www.sfc.hk/en/About-the-SFC/Our-role/How-we-function/Regulatory-tools) Investor education serves a preventative purpose by helping investors understand and protect their interests.

Practical techniques include marking to market, limit setting and hedging. Marking to market revalues positions or collateral at current prices; margin falling below maintenance requirements can trigger a margin call. Limits can cover positions, intraday exposure, overnight exposure and stop-loss arrangements. Hedging uses another position to offset adverse price movements: selling stock index futures, for example, can offset part of an equity portfolio’s losses when the market falls.

Barings in 1995 highlighted the need to separate trading and settlement duties. The Asian Financial Crisis of 1997–1998 and Global Financial Crisis of 2007–2008 illustrated the consequences of underestimating credit and market risks. The European Sovereign Debt Crisis in 2010 and Coronavirus Crash in 2020 also showed how risks can affect many markets. Hong Kong’s Lehman Minibond episode underlined legal, reputation and systemic risks. The IA also strengthens customer protection through measures including its ILAS sales guideline. [IA guidelines](https://www.ia.org.hk/en/legislative_framework/guidelines.html)