Finance: What is Event Risk?

What is Event Risk? Event risk just means that some random event has taken place that has affected a company’s ability to conduct business and consequently their financials in a negative way. These events can include crazy things like natural disasters or more financial things like market crashes and such.

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Transcript

00:28

problem well then there's market risk too [S&P 500 graph appears]

00:31

stock markets go up and down all the time so yes over time they go up but

00:36

well you might own stock in a great company that in a bad market gets taken

00:40

down like all the other boats in the ocean when a big quake hits and suddenly

00:45

it's a tsunami time and well everything drops but historically if you hold good [People in discussion at a meeting]

00:49

companies long enough well well their high quality bails you out of any

00:53

short-term losses you've suffered so if these are normal risks that happen all

00:58

the time they're things that just go on and on it's all part of the investing

01:02

world then what's an event risk which implies that something happened there

01:07

was a vent there was a finite period of time a finite situation that made bad

01:12

things happen with the overhang that events you know like a solar eclipse or [Solar eclipse appears]

01:17

or the election of a smart ethical congressman well those don't happen all

01:22

the time that's an event right it's a one-time thing well here's an event a

01:25

meteor hits the earth and all of a sudden while the most prized possessions [Meteor strikes earth]

01:30

are simple things like water and gas and land with wood and animals yeah that's

01:36

an event well the value of your Amazon and Netflix stock in that case well

01:40

those companies are probably not worth whole lot cuz internet is probably

01:44

dead or at least injured so when wizened old investors invest they typically [Old investors appear holding stock]

01:50

think about "once in a lifetime" events with event risk as being

01:56

a risk that they have to account for and yes thinking about that meteor hitting

02:01

the earth in fact is one of the things that professional portfolio manager

02:05

thinks about when building their fund and if you want to do something a little

02:08

more realistic than a meteor what about some crazy dictator and [Rocket appears in the sky]

02:12

Korea nuking us yeah not like one in a gazillion chance probably well more

02:17

recent event was the near-death experience of the US financial system in

02:21

the 2008/09 mortgage crisis where trust in banks and the banking system

02:25

almost led to the bankruptcy of Goldman Sachs Bank of America JP Morgan and a

02:29

bunch of other formerly perceived as bulletproof financial institutions yes

02:34

there was an event and a whole lot of risk and we almost died

02:37

financially anyway eventually the capital markets worked investors came to

02:42

trust the system again and they invested their money in the stock market with [Cash piles up]

02:45

staggering results in that the stock market went up some 400 percent in the

02:50

decade after the financial crisis so events are a real thing you have to

02:55

think about them until you don't [Man falling to the ground on a rocket]