Financial risk

Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financial loss and uncertainty about its extent. Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financial loss and uncertainty about its extent. A science has evolved around managing market and financial risk under the general title of modern portfolio theory initiated by Dr. Harry Markowitz in 1952 with his article, 'Portfolio Selection'. In modern portfolio theory, the variance (or standard deviation) of a portfolio is used as the definition of risk. Asset-backed risk is the risk that changes in one or more assets that support an asset-backed security will significantly impact the value of the supported security. Risks include interest rate, term modification, and prepayment risk. An asset-backed security is a security backed by the cash that comes from numerous assets. The financial security is backed by student debt, leases, car loans, credit card debt, and more. Typically, the assets of an asset-backed security are not liquid and can't really be sold on their own. However securitization, is the process of pooling the assets together to create a security allows the owner of the assets to make them marketable. The creation of asset-backed securities start when lenders sell their collateralized loans to a large financial institution which then creates and places the loans into a trust. Cash flow then goes into the trust as the loans are being paid off while cash flows out as payments to the investors who bought the securities from that trust. It has many advantages to both the lenders and investors. For example, it allows lenders to make a profit by increasing the lending and at the same time it encourages investors to invest their money into different assets that will benefit them. Lenders are able to create a pool of assets that would have resulted to be more challenging to trade individually. Asset-backed securities are fixed-income assets whose risk and return can be tailored to meet the needs of distinct investors.