Risks
What is Risk?
Risk is a concept that denotes a potential negative impact to an asset or some characteristic of value that may arise from some present process or future event. Risk is related to the expected losses which can be caused by a risky event and to the probability of this event. The harsher the loss and the more likely the event, the greater the overall risk.
Financial Risk is often defined as the unexpected variability or volatility of returns, and thus includes both potential worse than expected as well as better than expected returns.
How can I determine Risk?
Measuring risk is often difficult; rare failures can be hard to estimate. The mathematical difficulties interfere with other social goods such as disclosure, valuation and transparency. In particular, it is often difficult to tell if such financial instruments are "hedging" (purchasing/selling a financial instrument specifically to reduce or cancel out the risk in another investment) or "gambling" (increasing measurable risk and exposing the investor to catastrophic loss in pursuit of very high windfalls that increase expected value). Depending on the nature of the investment, the type of 'investment' risk will vary.
Economic and Market Risks
There can be no guarantee that an active market in the Shares will develop. Investors should recognize that the Shares, once listed, may trade on WSE at higher or lower prices than the Initial Offer Price. In particular, investors should consider the historical volatility of a virtual economy such as Second Life. The price at which the Shares trade on WSE may be affected by a number of factors, including the financial and operating performance of the company and external factors over which the company and the Directors have no control. These external factors include actual, expected and perceived general economic conditions, changes in policies or the terms of service by Linden Lab or the World Stock Exchange and significant events such as natural disasters or acts of terrorism, investor attitudes, government regulations on Second Life, movements in stock markets and general conditions in the markets in which the company operates.
Capital Risk
A common concern with any investment is that you may lose the money you invest - your capital. This risk is therefore often referred to as capital risk.
Currency Risk
If the assets you invest in are held in another currency there is a risk that currency movements or changes in the terms of service by fictional currency providers alone may affect or remove the value. This is referred to as currency risk.Liquidity Risk
Many forms of investment may not be readily scalable on the open market (e.g. commercial property) or the market has a small capacity and may therefore take time to sell. Assets that are easily sold are termed liquid therefore this type of risk is termed liquidity risk.Risk and Return
A fundamental idea in finance is the relationship between risk and return. The greater the amount of risk that an investor is willing to take on, the greater the potential return. The reason for this is that investors need to be compensated for taking on additional risk.Other Risks
Investors may need to measure credit risk, information timing and source risk, management risk, operational risk, probability model risk, and legal risk if there are regulatory or civil actions taken as a result of some "investor's regret.
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