Types of Portfolio Risk. Now, investments are evaluated based on several factors including risk and return, which are actually the dominant drivers in investment decisions. While most investors are comfortable with the return side of things, most are not comfortable with risk in general. This leads us to the various types of risk involved in making investment decisions. First, let's discuss loss of principal, and that involves the chance that you may not get all your money back, that you may lose the value or at least a portion of your original investment. Now, as you would expect, conservative investors would be most concerned with loss of principal because a conservative investor values protecting principal over seeking appreciation, and an investor is comfortable accepting lower returns in this case for a higher degree of stability. And typically, a conservative investor primarily seeks to minimize loss of principal and minimize risk. Now, with very limited exceptions, like a interest-bearing checking or savings account or a CD, loss of principal risk is present in essentially all investments. Next, we'll take a look at what's called sovereign risk. Now, sovereign risk involves a chance of a government going bankrupt or failing, or failing to make payments on its debt, or not honoring its loan agreements. Now, how could that happen? Well, if a country's experiencing financial difficulties, they may not be able to make payments based upon agreed upon terms of debt and possibly go into what we call default. We have also seen governments refuse to honor their loan agreements, and a government can resort to that type of practice by easily altering any of its laws, thereby causing adverse losses to investors who invested in that country's debt. In terms of historical examples, countries like Argentina and Mexico defaulted on their loan payments back in the 1970s to a big extent after an oil shock. And more recently, we saw Greece default on its debt. While in theory, you're exposed to sovereign risk in any investment, it's really most prominent in investments made in emerging market countries. And just like individual bonds, rating agencies, like Standard & Poor's and Moody's, rate the credit quality of all countries to give investors a measure of this sovereign risk. Next, let's take a look at what's called purchasing power risk. Purchasing power risk is maybe more widely loan as inflation risk, and it's the chance that the cash flows from your investment won't be worth as much in the future because of inflation or changes in prices. Now, while inflation won't generally affect an investor's nominal return, assuming they hold it until maturity, it will affect an investor's real return, and it can be lower than the return originally expected. Now, it's also important to note that inflation risk isn't the risk that there will be inflation, but it's more so the risk that inflation will be higher than expected, and that's because expected inflation would already be priced into the value of the securities. Purchasing power risk is most prominent in bonds and other fixed income securities, and some securities actually attempt to address the risk by adjusting their cash flows for inflation to prevent any changes in purchasing power, TIPS or a Treasury Inflation-Protected Securities are perhaps the most popular example.