Capital Risk
Chapters in this video
- 0:00 Capital risk defined: losing your principal
- 1:21 The zero-risk zone: FDIC insurance and the $250,000 limit
- 2:16 The Treasury maturity trap: held to maturity versus sold early
- 3:13 Climbing the risk ladder: bonds, equities, and options
- 4:03 Diversification versus asset allocation: horizontal and vertical defense
- 5:05 Rapid-fire exam recap
What this video covers
- The exact meaning of capital risk (principal risk): the risk of losing part or all of your original investment
- Why FDIC-insured bank deposits carry zero capital risk, and the specific coverage limit of $250,000 per depositor per institution
- The critical exam trap: U.S. Treasury securities are free of capital risk only if held to maturity, because selling early during rising rates triggers a capital loss
- How capital risk increases across the asset spectrum: none for insured deposits, low to moderate for investment-grade bonds, moderate to high for equities, and very high for options
- Why equities carry higher capital risk than bonds: stock prices can fall to zero with no guaranteed return of principal
- The distinction between diversification (horizontal defense, spreading across multiple investments) and asset allocation (vertical defense, balancing risk levels by asset class)
- Why no strategy except FDIC-insured deposits within the limit completely eliminates capital risk
Read the full lesson, free
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