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Risk & return

What is risk?

In investment terms, risk is an indicator of the potential gain or loss associated with investing over time.

How does risk relate to return?

All investments involve varying degrees of risk and generally, risk is related to the potential return from your investment - the higher the level of risk you are prepared to accept when investing, the higher the potential return will be.

Certain investments involve more risk than others. For example, shares are usually considered to be the most volatile asset and are associated with the highest risk. They also have the potential to give the highest returns over the medium to long term. Investments such as bonds (fixed interest securities), on the other hand, generally have a lower risk profile and so, over the same time, may have a lower return.

A managed investment can reduce the inherent risks in most types of investments through the use of diversification. To learn more about this, visit the section on diversification.

Risk and time

Something you should consider when determining your risk comfort level is your investment time horizon. If you expect to make a very high gain in a very short period of time, then you will need to accept very high risks. In contrast, if you are prepared to take a longer term view of making gains, you can moderate the risk on your investment.

What is market risk?

This is the chance that unexpected conditions (eg economic or political) in a particular country could have a negative impact on the returns of all investments in that market. An example would be a fall in the value of shares in the sharemarket, similar to that which occurred in 1987. It is not possible to anticipate all market risks.

How does BT manage this type of risk?

In managing market risk, BT closely monitors financial markets, seeking to identify potential negative market moves. We may also use financial instruments known as derivatives to protect the value of investments through hedging.

What is currency risk?

For investments in international markets, currency risk - the chance that foreign currencies may fall in value relative to the New Zealand dollar - can negatively impact investment returns.

How does BT manage this type of risk?

BT manages currency risk by assessing likely moves in currency markets and altering currency exposures within funds when appropriate. This is usually achieved through forward rate agreements, other currency derivatives and adjustment of the holdings of overseas assets.

What is company or security specific risk?

Security specific risk is the risk that the value of a specific share or security falls due to unexpected changes in the entity's internal operations or immediate environment. There are many specific risks that apply to an individual company or security. Examples include the possible effect on a company of losing a key executive, the unforeseen entry of a new competitor into the market or the implications for a country's bond rates of a change of government.

How does BT manage this type of risk?

It would be impossible to anticipate all company or security specific risks. However, at BT we seek to identify potential risks before we invest, through our intensive and thorough research and analysis process. By closely monitoring all BT investments, our professional fund managers are able to swiftly alter exposures where necessary. In addition, diversification via a carefully selected, broadly based portfolio of company shares or securities also helps reduce this risk.

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