What is valuation risk?
It’s the danger that a financial asset is overvalued and will bring in less than expected when it matures or is sold. Things that contribute to valuation risk include market volatility and poor data analysis by those responsible for determining the value of the asset. Overvalued assets can generate big losses.
Where have you heard about valuation risk?
If you have an investment fund, the portfolio manager responsible for looking after it is tasked with keeping valuation risk to a minimum. However, they can’t control factors like a sudden economic downturn or unexpected collapse of a company that the fund has invested in.
What you need to know about valuation risk.
Initial public offerings and bond issues are heavily regulated so valuation risk is low. Company reports are used to confirm that the offering is fair and doesn't expose investors to unnecessary risks. Once trading begins on the open market though, valuation risk can't be controlled.
All investors are concerned about valuation risk, whether you’re an institutional investor or saving for your retirement. That's why careful analysis and research, either done by yourself or a financial expert, is needed to reduce the chances of taking a hit on an asset.
Find out more about valuation risk.
Read our definition of value at risk for further insight into determining risk.