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Glossary definition: Financial Risk

Financial Risk: Understanding & Managing Risk Exposure

Financial risk is the potential for financial loss or other adverse outcomes resulting from decisions made by an individual, organization, or government entity in the pursuit of financial gain. It can arise from a variety of sources, including financial markets, investments, corporate finance, lending, and other financial activities. Financial risk can be divided into two broad categories: systematic and unsystematic risk. Systematic risk is the risk that is associated with the entire market, and is often caused by macroeconomic events such as changes in interest rates, inflation, or the stock market. Unsystematic risk is the risk associated with a particular security or sector, and is typically caused by specific events such as company-specific news or changes in management. Financial risk management is the process of identifying, assessing, and managing the risks associated with financial activities in order to minimize the potential for financial losses. This involves analyzing the risks associated with various investments and financial activities, developing strategies to manage those risks, and monitoring the performance of those strategies.