Macro risk is

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 financi ...

that is associated with

macroeconomic Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output/ GDP ...

or political factors. There are at least three different ways this phrase is applied. It can refer to economic or financial risk found in

stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...

s and

funds Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm us ...

, to political risk found in different countries, and to the impact of economic or financial variables on

political risk Political risk is a type of risk faced by investors, corporations, and governments that political decisions, events, or conditions will significantly affect the profitability of a business actor or the expected value of a given economic action. Po ...

. Macro risk can also refer to types of economic factors which influence the volatility over time of investments, assets, portfolios, and the intrinsic value of companies. Macro risk associated with stocks, funds, and portfolios is usually of concern to financial planners, securities traders, and investors with longer time horizons. Some of the macroeconomic variables that generate macro risk include

unemployment rates This is a list of countries by unemployment rate. Methods of calculation and presentation of unemployment rate vary from country to country. Some countries count insured unemployed only, some count those in receipt of welfare benefit only, some co ...

price index A price index (''plural'': "price indices" or "price indexes") is a normalized average (typically a weighted average) of price relatives for a given class of goods or services in a specific region over a defined time period. It is a statistic ...

es,

monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rat ...

variables,

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

exchange rate In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of ...

housing starts Housing starts is an economic indicator that reflects the number of privately owned new houses (technically ''housing units'') on which construction has been started in a given period. These data are divided into three types: Single-family detache ...

, agricultural

export An export in international trade is a good produced in one country that is sold into another country or a service provided in one country for a national or resident of another country. The seller of such goods or the service provider is a ...

s, and even prices of raw materials such as

gold Gold is a chemical element; it has chemical symbol Au (from Latin ) and atomic number 79. In its pure form, it is a brightness, bright, slightly orange-yellow, dense, soft, malleable, and ductile metal. Chemically, gold is a transition metal ...

. Models that incorporate macro risk are generally of two types. One type focuses on how short-term changes in macro risk factors impact stock returns. These models include the

arbitrage pricing theory In finance, arbitrage pricing theory (APT) is a multi-factor model for asset pricing which relates various macro-economic (systematic) risk variables to the pricing of financial assets. Proposed by economist Stephen Ross (economist), Stephen Ross i ...

and the

modern portfolio theory Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of Diversificatio ...

families of models. The other models that incorporate macro risk data are valuation models or the closely related

fundamental analysis Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, Liability (financial accounting), liabilities, and earnings); health; Competition, competitors and Ma ...

models. Used primarily by those focusing on longer term investments including wealth managers,

financial planner A financial planner or personal financial planner is a qualified financial advisor. Practicing in full service personal finance, they advise clients on investments, insurance, tax, retirement and estate planning. As a general rule, a financial p ...

s, and some

institutional investor An institutional investor is an entity that pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linked ...

s, these models are examples of intrinsic value analysis. In such analysis,

forecasts Forecasting is the process of making predictions based on past and present data. Later these can be compared with what actually happens. For example, a company might estimate their revenue in the next year, then compare it against the actual resu ...

of future company earnings are used to estimate the current and expected value of the investment being studied. Macro risk factors include any economic variables that are used to construct these estimates. Understanding that macro risk factors influence the intrinsic value of a particular investment is important because when the factors change values, errors can be introduced in the corresponding intrinsic value

. Investors who follow the

Black Swan Theory The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. The term arose from ...

may try to reduce the overall exposure of their investments to different macro risk factors in order to reduce the impact of economic shocks. This may be accomplished using commercial

portfolio optimization Portfolio optimization is the process of selecting an optimal portfolio (asset distribution), out of a set of considered portfolios, according to some objective. The objective typically maximizes factors such as expected return, and minimizes c ...

tools or by using

mathematical programming Mathematical optimization (alternatively spelled ''optimisation'') or mathematical programming is the selection of a best element, with regard to some criteria, from some set of available alternatives. It is generally divided into two subfiel ...

methods. Another way macro risk is used is to differentiate between countries as potential places to invest. In this meaning, the level of a country's macro risk differentiates its level of political stability and its general growth opportunities from those of other countries, and thus helps identify preferred countries for investment either directly or through country or regionally oriented funds. Such analysis of

is also used for the purposes of credit insurance on foreign sales and in other financial analysis such as credit default swaps and other sophisticated financial products.

International rankings This is a list of international rankings by country. By category Agriculture * Production **Apple ** Apricot ** Artichoke ** Avocado **Barley **Cereal ** Cherry **Coconut **Coffee ** Corn ** Cucumber **Eggplant **Fruit ** Garlic **Grape ** Papaya ...

of countries, often updated annually, provide insight into their relative political and social stability and economic growth. A new application of macro risk is essentially a converse of the first two meanings; it refers to how

macroeconomics Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output (econ ...

and fluctuations in financial variables generate

. For example, economic turbulence that leads to higher or lower levels of approval for the president's policies would be a form of this macro risk.

References

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External links

Tainer, E.M. Using Economic Indicators to Improve Investment Analysis (3e), Wiley, 2006

References

External links

Further reading