What is Aggregate Risk?

by Investing School on September 1, 2010

Aggregate risk refers to an investor’s amount of exposure related to actions of spot contracts. Spot contracts are transactions that are carried out which have an immediate settlement. The settlement in most markets is within two working days. Aggregate risk also refers to an investor’s risk or exposure to actions in conjunction with forward contracts. A forward contract is a contract that is not a standard contact between two parties that arranges to buy or sell an asset at a specified time in the future. The price is agreed upon immediately.

Aggregate risk is also a risk or an exposure that is related to overall aggregate market returns. Aggregate risk is sometimes known as market risk, undiversified risk or even associate risk. If the deadlines of these risks are not met there are consequences to such actions. Because each risk has its own method or process there is an inherent risk involved and many business owners will opt to incorporate their companies. Incorporating their companies will provide them with some limited protection.

If you look at a capital asset pricing model as an example, you will see that the rate of return that is necessary for an asset that is in the market equilibrium will depend on the aggregate risk that is associated with the returns on that asset. Risks that are not associated with this model are referred to specific risk, diversifiable risk or idiosyncratic risk. Aggregate risk is sometimes referred to as systematic risk, market risk or undiversifiable risk.

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