Risks Associated With Financial Markets

Risk is a term often heard in the world of investing, but it is not always clearly defined. It can vary by asset class or financial market and the list of risks include default risks, counterparty risks, and interest rate risks. Volatility is sometimes used interchangeably with risk, but the two terms have very different meanings. Furthermore, while some risks relate to just one company, others are relevant for specific industries, sectors$,$ or even entire economies.

Systemic and Non$-$Systemic Risk

Risks are typically one of two types: systemic or non$-$systemic. A systemic risk is one that happens within a company or group of companies that can create havoc throughout an entire industry, sector, or economy. The financial crisis of $2007-2008$ is an example, as a handful of large institutions threatened the entire financial system. This gave rise to the adage "too big to fail" because many of the large banks were deemed too important and thus needed a bailout from the U$.$S$.$ government.

Non$-$systemic risk relates to one party or company and is also called unsystemic or diversifiable risk. For example, a company might face risks of substantial losses due to legal proceedings. If so$,$ the shares might be vulnerable if the company loses a lot of money due to an adverse court ruling. This risk is likely to impact just one company and not an entire industry. It is said that the diversification of a portfolio is the best way to mitigate non$-$systemic risk.

Required

Evaluate any three risks associated with financial markets in South Africa. $(20$ marks$)$