A security that exposes its holder (investor) to market risk in terms of volatility as to price, rate, returns, repayment of principal amount, etc. However, the exposure to market risk, in all its different types, entails attachment of risk premium to such a security. Examples of risky securities include non-agency mortgage-backed securities (MBS), asset-backed securities (ABS), corporate debt, structured financial products (SFP), equities, and municipal bonds.
Risky securities are also characterized by the existence of a credit risk and the possibility of experiencing price risks during periods of large selling volumes. The expected return on such securities cannot be less than the risk-free rate (RF) that safe or riskless securities bear. In other words, risky securities have higher average returns than riskless securities (due to the risk premium commensurate to the additional amount risk assumed by holders of risky securities).
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