Risk Asset: Definition and Examples

What Is a Risk Asset?

A risk asset is any asset that carries a degree of risk. It generally refers to assets with significant price volatility, such as equities, commodities, high-yield bonds, real estate, and currencies.

In the banking context, a risk asset is an asset owned by a bank or financial institution whose value may fluctuate due to changes in interest rates, credit quality, repayment risk, and other factors.

Additionally, the term may also refer to equity capital in a financially stretched or near-bankrupt company, as its shareholders’ claims would rank below those of the firm’s bondholders and other lenders.

Key Takeaways

• Risk assets include equities, commodities, high-yield bonds, real estate, and currencies.
• In banking, risk assets are owned by financial institutions and may fluctuate in value due to various factors.
• Risk assets may also refer to equity capital in financially stretched companies.

Understanding Risk Assets

Investor appetite for risk assets swings considerably over time. From 2003 to 2007, investor demand drove up prices of assets associated with above-average risk, including commodities, emerging markets, subprime mortgage-backed securities, and currencies of commodity exporters like Canada and Australia. However, the global recession of 2008 to 2009 triggered a massive aversion to risk assets, with capital flowing to the safe-haven of U.S. Treasuries.

Since March 2009, times when investors have substantial appetite for risk assets have been referred to as "risk on" periods, while intervals of risk aversion are known as "risk off" periods. These swings in risk appetite are influenced by global macroeconomic concerns, such as European sovereign debt and the U.S. fiscal cliff.

How Risk Assets Can Affect a Portfolio

A rise and fall in the value of unregulated cryptocurrency is an example of a risk asset experiencing market fluctuations. The increased use of cryptocurrencies, like Bitcoin, led to rapid growth and attracted early investors. However, varying degrees of understanding and hype surrounding these investments attracted new investors, ultimately resulting in a decline in value.

This decline was driven by discussions for potential cryptocurrency regulation and fears of over-speculation, which contributed to the decline of this risk asset.