Risky assets are those whose returns or value of which are highly volatile. Risky assets are very susceptible to changes in interest rates, credit quality, market conditions, demand and supply scenario, etc. Even changes in economic and fiscal policies have a bearing on the returns that one can expect from such risky assets.
Risky assets being vulnerable to various parameters has the potential to generate very high returns as well. The changes in various parameters that may adversely affect the performance of the assets has the potential to give very high returns , had been the changes were in the reverse direction. People often hedge their exposure in risky assets to enjoy the benefits of the investment but to limit the loss one may incur from that investment.
Assets with very high risk components are :
- Foreign currency
- Commercial Real estate
- Equities
- Start-up equities
- Emerging markets
- Sub-prime mortgage backed securities, etc.
But it should be noted that all financial products are exposed to some risk or the other. Products which offer safe and fixed returns like bank fixed deposits are exposed to inflation risk i.e., the inflation rate may be higher than the return assured and the investor will lose his purchasing power. There is also re-investment risks.
So, its very important to have a diversified portfolio.
