Breakdown of Risk

Actions/risk
that affect only
------One firm-----Few firms---------Many firms---All investments--
                                
Firm-specific=1====2===3==========4=======5===Marketwide


1.  Projects may do better or worse than expected.
2.  Competition may be stronger or weaker than anticipated.
3.  Entire sector may be affected by action.
4.  Exchange rates and political risks affect many stocks.
5.  Interest rates, inflation, and news about economy affect all stocks.

What is RISK? Equity investment is the most risky investment in all the financial markets.

Risk Reward Ragas


Whenever we talk about investments, there is always some risk associated with all of them. Risk is the most dreaded word in all the financial markets across the globe. Any person, who is operating in the financial markets, in whatever capacity, has to face risk. So the question in most minds is, what exactly this RISK is? What does it mean?

In general terms, risk means any deviation from expectations. In Financial parlance, risk means any deviation from the expected returns. More specifically, the probability that the returns from any asset will differ from the expected yields is the risk inherent in that asset. We all face risk in our lives in one way or the other. So lets have an understanding of the risk

Risk inherent in equity investments

Equity investment is the most risky investment in all the financial markets. So one needs to have an understanding of risks associated with equity investments. Broadly, there are two types of risks associated with equity investments, viz., systematic risk and unsystematic risk. Lets have an understanding of these two types of risks.

Systematic risk: or the market risk, as it is called, this is the variation in the return on any scrip due to market movements. For example, suppose the Government announces a corporate tax cut or rise across the board, it is going to effect all the stocks in the market in the same way. This is the systematic risk of scrip, which exists because of market movements.

There is nothing much one can do about systematic risk of a security because it arises due to some extraneous variables. But there still exists some techniques, which help to hedge against the systematic risk of a security.

A good measure of an asset’s systematic risk is its Beta. Beta is calculated by regressing the returns of a particular asset on market returns. It can be interpreted as, say the beta of a stock is 1.25, then whenever the market moves by 1%, the stock will move by 1.25%.

Unsystematic risk: is the variation in the return of a scrip due to that scrip specific factors or movements. For example, say the Government announces tax sops to companies in a particular sector, it is going to effect the prices of the stocks of companies which are operating in that sector and not all the stocks.


Measuring risk

We can measure risk in two ways – Ex post and Ex ante risk measurement. Ex post measurement is done after the happening of an event and Ex ante measurement is done before the happening of an event.

Ex post Risk

When risk is measured ex post, it is measured as Variance from the mean value. That is, it is the statistical measure of Variance associated with the returns on a particular asset. For example, if one wants to measure risk associated with a particular stock, he will take the returns generated on the stock over a period of time and then he will find out the variance in the return of that particular stock. That variance will be the risk of that stock.

Ex ante Risk

When it is measured ex ante, it is measured as the probability that the returns from an asset will deviate from the mean or the expected returns. For this, if the variable has a normal distribution, the Theory of Normal distribution can be easily applied to find out the probability of this deviation. Otherwise subjective estimates of the probability have to be made.

For example, say the changes in a stock price have normal distribution. One can take the mean return based on the past return of the stock. Then, using the Standard Normal probability distribution, he can find out the probability of the return on that stock falling below that mean or expected return.

If the stock price is not normally distributed, then he will have to make subjective estimates of probabilities of getting a particular return. Using that, he can find out what is the expected return on that stock. Then the risk on that stock is the statistical measure of variance in return of that stock from the expected return.

Hedging risks associated with equity investments

Risk Hedging encapsulates all the activities required to ensure that the exposure, one is having, on account of the risk, doesn’t transform into loss. That is, the exposure is only a notional loss, which might transform into actual loss on happening of a particular event, but if necessary steps are taken to control, manage and diversify away the risk, this exposure can be controlled. All the activities undertaken to do so collectively comes under the purview of risk hedging.

In the following section, we present some of the commonly used techniques for managing risks:

Use of derivatives: Derivatives are most commonly used to hedge against the market risk. The use of the type of derivative instrument depends upon the expectations. An example will make the point clear. Say, you have 100 Reliance shares, the market price of which is presently RS. 300. Now you expect that the price of Reliance might go down in the future due to some reason. To hedge yourself against this risk, you can buy a Put option on Reliance’s stock and lock in a price. If the price actually falls, you can sell those shares at the price you contracted through Put option. If you expect prices to rise and you want to buy shares in the future, you can buy a Call option on Reliance’s stock.

To learn more about derivative basics, click here (a link to our derivative channel).

As of now, the use of derivatives on individual securities is not allowed in India. Sometime back, the use of any derivative instrument was not allowed in India. But now the SEBI has allowed the use of Index Futures on BSE and NSE. Soon, these Futures instruments will start trading on other exchanges also. And in due of course of time, the entire range of derivative instruments will be allowed in India.

Making a portfolio: To guard yourself against market risk, you can also make a portfolio of stocks whose returns are negatively correlated with each other. If you make a portfolio of two stocks whose correlation co-efficient is –1 (minus 1), then your market risk is minimized.


http://www.karvy.com/buysell/risk.htm

Responding to risks

Responding to risks - the actions you can take once you've identified a risk and understood its probability and impact.

There are usually risks that cannot be avoided in business, no matter what alternative we choose.  Our decisions therefore focus on how we will respond to them, rather than trying to avoid them.   Responses to risk will vary from business to business and from risk to risk, but they tend to fall into one of these categories:

• eliminating
• tolerating
• minimising
• diversifying
• concentrating
• hedging
• transferring
• insuring

Deciding which of these responses is appropriate in any given situation requires careful analysis of the risk in terms of probability, impact and potential outcomes (expected values).

Getting it right

Whatever approach you choose to the risks you face, there are central themes to risk management that have to be in place for it to be successful.

Effective decision making and risk management are based on understanding, information and consistency.  It is vital that everyone involved is working from a shared idea of the significance of the risks facing the business, the probability of them occurring and the actions that they need to take in order to minimise downsides (or maximise upsides).

Here are some questions to ask in key areas to assess your risk management capabilities:

understanding operational risk:

• are the risks that can arise in key business process understood?
• are the implications of choosing or creating particular new processes understood?
• are the impacts of operational risk understood, in terms of their immediate impact and also any potential impacts at higher levels?

understanding strategic risk:

• are decision makers aware of the strategic risks facing the business?
• are the implications of 'doing nothing' or continuing along the present course understood?
• has 'business as usual' been examined in the same way as a 'risky' new direction would be?
• have the risks implied simply by entering or remaining in a particular market been examined?

understanding probability:

• have probabilities been quantified in a consistent way, that allows for comparison?
• what evidence is there to support estimates of probability?
• where there is uncertainty, has this been understood and acknowledged by decision makers?
• is there shared understanding of the subjectivity involved in probability calculations?

understanding impact:

• have impacts been quantified wherever possible, to allow for comparison?
• is it clear where risks might impact on more than one area of the business?
• is there the potential for risks to have interdependencies, making the occurrence of two or more risks together more significant?
• are the different levels of impact understood (operations, strategy, financial, cultural)?

information:

• documenting:  how will risks, responses and results be documented?  what proceducres will be used for recording the actions taken to manage risks and their results?
• sharing:  how will information on risks and the success (or otherwise) of particular response be disseminated throughout the business, to avoid duplication of effort?
• communicating:  who owns key information? who does it need to reach in order to support decisions on risk? what are the best media, formats and techniques for communicating?

clear roles and responsibilities:

• whose responsibility is each risk? who 'owns' it by default?
• who has enough authority and/or information to take a decision on how risks will be managed?
• who will take action to manage the risk?  who will become its new 'owner'?

reporting and monitoring:

• who needs to know what, and when?
• what is the best medium or channel to provide information on risks, such that those who need to take decisions have the information they need in a format they will find conducive?

consistency of approach:

• if similar risks occur in different parts of the business, is the response the same?
• could risks easily be aggregated across the business if this kind of concentration brought benefits?

consistency of analysis:

• where possible, are risks assessed using standard, objective criteria, or at least those that are agreed by all within the business?

consistency of tools and techniques:

• where decision-making tools are used, are they used in a consistent way across departments and teams?
• is there a genuine shared perspective on risks that affect different groups?

consistency of terminology:

• are risks described in terms that allow meaningful comparison and evaluation across the business?
• are common terms used with the same sense throught the business?
• are there any aspects that need to be quantified, or made less subjective, to allow for more focused discussion between those involved?

The Information Trade-Off

Obtaining more information can help improve the quality of decisions by providing more detail about impacts and reducing subjectivity over probabilities.  It also helps to build up awareness of other alternatives that could be taken.  In general, it is a given that seeking more information will be beneficial to decision makers, having the general effect of reducing the level of uncertainty involved in a decision, and making it more likely that the outcomes of particular decisions will provide opportunities for learning.

However, there is a trade-off to be made.  Decisions usually have to be taken within a particular timeframe, and getting more information takes time.  It can also cost moneuy.

Both of these have implications for the level of extra effort that goes into facilitating more informed decision making.

The decision makers can reduce subjectivity by researching what is going on in various areas.  As they learn more and more, the probability that they are assessing becomes less and less subjective.  In the end (in theory at least), they can arrive at an objective probability.  However, there are some important issues facing them:

• getting information takes time:  the report must be submitted at a given deadline, even if they havent't pinned down the probability of the event occuring.
• gettting information costs money:  doing research will use up the resources of the business; you have to decide how much investment in information to support decision making is appropriate; this means assessing how sure you can be of the information you do have, and how much more certainty can be achieved for a reasonable cost
• situations change over time:  as you collect information to help you make a decision, the context or nature of the decision may be changing; there may be a limit to the accuracy you can achieve.

Inevitably, decisions have to be made with limited information.  Before you make a decision, you have to decide whether the information at your disposal is sufficient to make the decision, or whether you are going to make an investment (in terms of time or money, or both) in getting more information - and how this might affect the nature of the decision itself.  (You also need to guard against certain psychological traps.)

Management actions feed into decisions and affect their outcomes, whether this is in the form of considering decisions for longer, obtaining more information or just bringing different personal perspectives and experience to bear on the decision.  There will always be uncertainty involved, but by putting time and effort into decision making, its negative effects can be minimised.  In many decision situations, there is a 'third way' - the choice not to follow one of the branches on the tree, but to invest more effort in refining the picture of the decision before it is taken.

This poses interesting questions:

• how much is your time worth?
• what potential downside of this decision would you be prepared to accept if you could spend the time thinking about another issue instead?
• what potential upside do you regard as being a good 'purchase' to make with your time?

Up to this stage, you have acquired the knowledge you need to assess whether simple games of chance are worth playing.  Business decisions are much more complex and subltle than this, and you will never reach a point where you 'know everything', as in the dice game.  The issue is how much time to put into making a decision, and whether to put additional resource in obtaining more information before making the decision. 

In the end, this is likely to be a judgement call.  While time can be quantified and given a nominal cost,k the benefit to be obtained from it is likely to be very difficult to quantify.  In fact, until you actually invest the time, you cannot know how beneficial the information you gain will be.  We have to deal with this contradiction every time we take a business decision.

A picture of complex risks and their profiles is more useful than knowing expected value is positive or not

Risk profile

A risk profile is a graph showing value - usually expressed in financial terms - and probability.  Looking at the profile of a risk can give a more sophisticated view of it than expected value alone. 

http://spreadsheets.google.com/pub?key=tHk2EpsXiBSmmV6BILRm7IA&output=html


Let's consider a third version of the dice game - version C.  As before, throwing different numbers brings different outcomes.  But in this version, there is the possibility of a severe downside.  Thowing 5 or 6 wins $10; throwing 2, 3, or 4 wins $5; throwing 1 incurs a $10 penalty.

The different outcomes and probabilities are shown in the table above, along with the calculation of expected value for this game.  As before, expected value is calculated by adding together the products of impact and probability for all possible outcomes. 

At first glance, this game looks like the best so far - its expected value is far higher than that of either version A or version B.   ( http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html)

But what about the potential downside?  With $5 in our pocket to play with, we could easily incur a debt that we can't pay, and have to declare ourselves bankrupt.  With $20 to play with, we would be a bit safer (the wealth effect). 

The key to this decision is the profile of the risk.  (see the diagram of the risk profile for dice game version C above).    Each vertical black coloured bar represents a possible outcome.  Its position denotes its impact (negative to the left, positive to the right); its height denotes its probability.  The positive side of the graph looks promising, with high probabilities for positive outcomes.  But over on the left, we see the possibility of a serious negative outcome - a potentially fatal downside.  The risk may have an unacceptable profile for us, despite its positive expected value.

More complex risk profiles bring in more and more possible outcomes and probabilities.  They build up a picture of complex risks and their profiles that is more useful than the simple question of whether the expected value is positive or not.

Histograms plot value against probability density, to give a continuous version of the risk's profile.  They are created through advanced risk anlalysis involving techniques such as Monte Carlo simulations, where a large number of probabilities is used to create the risk profile.

Making Life Decisions: appraising cost, risk and expected value, with limited information about the future

The dice games are simple parallels with the type of decision we take every day in our lives.  Investments offer the most direct comparison.  With a limited sum to invest, you have to evaluate the probability of making a profit, the expected value and the risk involved for each investment alternative.  And, as with the dice, you hve the alternative not to play, which is 100% safe, but will not make you any money.

We make other kinds of decisions too, where the investment is not always financial:

• selecting a savings account (which will make you richest in the long term?)
• buying a house ( will prices fall or rise?)
• deciding which people to socialise with (who will turn out to be better company?)
• renting a film to watch (which will you enjoy the most?)

However vaguely or subconsciously, we are appraising cost, risk and expected value, with limited information about the future, all the time - even if the only cost is our leisure time, the only expected value a fleeting enjoyment, and the only potential loss a mild feeling of irritation.

Decision making: Risk, Probability, Impact, Subjectivity, Decision trees and Expected Value

You are invited to play dice games version A and version B.  In this game, you bet $1 on the throw of a dice.  Throwing a six wins a prize; throwing any other number means you lose your $1.

In version A of this game, a bet costs $1, but you can win $10.  Faced with this game, you have two alternatives - to play or not to play.  Once playing, there is nothing you can do to affect the outcome - so your decision on whether to play has to be made on the basis of the probabilities and impacts involved.  They are depicted on the decision tree here to help your decision.

http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html

Because the situation is simple, the probabilities of the various possible outcomes can be objectively known.  There is no subjectivity over the probabilities.  The impacts, too, are fixed and clearly set out by the rules of the games (the prizes and the cost of playing).  If a choice is made to play, the probability of winning is 1 in 6 (0.166 or 16.6%) and the probability of losing 5 in 6 (0.834 or 83.4%).  If a choice is made not to play, risk is avoided (there is a single outcome that is certain) but there is also no potential benefit. 

In version B of the dice game, the stake and odds remain the same, but you can only win $5.  The alternative not to play remains.  In each case, we have to decide whether to play or not.  There is the alternative to walk away, but this offers no benefit.  Is it better to play or not to play?  Version A seems better than version B, but how much better?  Is B worth playing as well, despite the lower prize?  How can we make a decision about where to make an investment?  Most people can offer answers to these questions based on an intuitive, subjective grasp of probability and impact.  We make decisions all the time on this basis.  But for business decisions, we need to move beyond subjectivity whenever we can.  We need to quantify things wherever possible.


The concept of expected value (EV)

To compare different alternatives against each other in a quantitative way in order to determine whether a risk is worth taking, we can use the concept of expected value (EV).  The expected value of a risk is obtained by multiplying probability by impact for each possible outcome, and adding all the results together.  If a particular impact is negative, the value for that outcome is also negative. 

The table below shows the expected value calculation for playing version A of the dice game.  The expected value is 0.66.  Because this is a positive value, it indicates that the game is worth playing.

http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html

In version B, because of the reduced prize (a variation in impact), the picture is different.  This is shown in the table also.  Because of the reduced prize, the expected value of version B is negative.  If you play it repeatedly, you will steadily lose money over time.

In this case, the alternative not to play, although it brings no benefit, has a higher expected value (zero) than playing (-0.17).  You are better off keeping your $1.

Expected value helps us ascertain whether a particular alternative is worth taking, based on our knowledge of probabilities and impacts.  But, unless the outcome of a decision is certain, expected value can only ever be used as a guide.

In version A, for example, the expected value of not playing is zero, and this is certain.  But if you decide to play, the only possible outcomes are winning $10 or losing your $1 - in other words, values of either +9 or -1.  An impact of +0.66 (the expected value) is impossible. 
And, while a positive expected value of 0.66 makes the game nominally 'worth playing', the outcome of playing is not certain.  You might still lose.

Conversely, the negative expected value of version B, while it indicates you should not play, doesn't necessarily mean you won't win if you do.  The possible outcomes are value of +$4 or - $1.  You might play once and win.  You might even play three times in a row and win all three times, although the probabhility of this is 0.0046 (or less than 1%).  Despite the negative expected value, a positive outcome remains possible.

The actual probability of realising the expected value as a result of a single decision is zero.  However, if you played version A 100 times, you would find the average value across those many decisions tending towards 0.66 - you would have around $166 in your pocket.  This would prove the accuracy of your initial calculation of expected value.

Calcuating or estimating expected value wrongly - or not wanting to calculate it at all - has serious consequences for decision making.  Consider the National Lottery.  Although the prize (potential upside) is enormous, the tiny probability of winning gives the game a negative expected value.  But the lure of the prize outweighs the rational considerations of probability, making people mentally distort probabilities (if they consciously think in those terms at all) and decide to take an illogical risk.  This is the essence of the appeal of gambling, and points the way towards the psychology of risk.

So, despite the name, we can never expect the expected value.  Some may ask, in that case, why use the concept at all?  The answer is to help in making decisions, rather than in predicting the future.  As we've seen, there are no facts about the future, only probabilities.  In this case, probabilities are known but a reliable prediction of the outcome remains impossible - the dice will decide!

We have already seen how, in most business decisions, the picture is clouded by subjectivity.  Not only is it impossible to predict the future, there will also be uncertainty over impacts and probabilities.

Expected value is calculated from probability and impact information or estimates.  Whatever subjectivity or imprecision is inherent in our probability and impact figures will feed through into expected values.  There are only as good as the information from which they are calculated.  Therefore, just as with probabilities, it is important to remember, and explain to others, when subjectivity is a factor.

Subjectivity and Impacts

The problem of achieving objectivity applies just as much to assessing impacts as it does to gauging probabilities.  It can be difficult to establish a basis for comparison, praticularly in the area of 'soft' impacts.  As with probabilities, the key is to express impacts numerically.  The commonest way to do this is in financial terms.

'Hard' impacts often lend themselves to quantification and comparison, making it relatively easy to express them financially.  For example, an interruption to the operation of a production line resulting from a power cut or a fire could be translated into likely impact on revenues or profits.

'Soft' impacts are much more difficult to quantify, but they can still be hugely significant for the business.  For example, falling revenues may result in disillusionment within the business - a negative cultural impact.  This may result in talented individuals leaving the business, which could lead to a self-perpetuating cycle of decline (a strategic risk).  Quantifying impacts financially helps to express the significance of 'soft' impacts in terms that everyone can understand, putting them on the same basis of credibility as 'hard' impacts.

As with probabilities, complexity also adds to subjectivity:

• range of impacts:  impacts can affect many different areas of the business, making it hard to gauge the total impact.
• interdependence:  one impact may result in another impact in a different area of the business
• lack of precedent:  the situation may be unprecedented, or the precedent may be far in the past, making it difficult to assess the likely impact today.

Subjective Probabilities are an unavoidable part of decision making

Subjective probabilities are an unavoidable part of business decision making. 

You often have to make an opinion on strategic issues facing your business.  For example, you may be setting the five-year plan for your business.  You would have to assess all the factors which could have a big impact of the industry in which you operate in.

The situation is very complex. Your partners have different views and may not reach agreement.  On top of that, other industry leaders are making their views and this may have an impact. 

All these complexity doesn't prevent you and your partner from forming a view - maybe nothing more than an instinct or a hunch - as to what is going to happen.  Perhaps, you both agree that it is "quite likely" that a certain factor will impact the industry in the next two years.  Since this is of strategic significance to the business, you will need to accomodate this in the planning.

As you and your partner put your thoughts down on paper, what exactly does "quite likely" mean?  You may think it means "almost certain", while your partner considers it means "fifty-fifty".  In other words, you think "quite likely" equals a probability of (say) around 95%, while your partner assumes it denotes a probability of around 50%.

How can these two views be brought closer together.  Perhaps, they could use a probability that is objectively knowable - such as the throw of a dice - for comparison.  Do you think that such and such a factor is more or less likely to occur than throwing a six?  If less, the probability is lower than 1 in 6 (0.166).  If more, the probability is higher.  By discussing the issue in these terms, you and your partner can move closer to a picture of probability that you both share - and one that you can communicate with some degree of confidence.  You can both use this information to help pin down this probability - combined with your own opinions, experience and intuition. 

Let's assume you and your partner agree on a probability of 75% that a certain factor will impact on the business within the next two years.  It is important to note that just because two people have agreed a figure, the probability hasn't become any less subjective.  Using numbers adds clarity and precision but does not necessary indicate accuracy.  In your written report, you and your partner will need to explain the facts and reasoning behind your probability calculations, and stress the fact that the probability remains subjective even though it has been expressed numerically.  (You might use a range, such as '70-80%')

Some decision makers may regard this as pointless - how can that help you make a decision?  If you can't know probability objectively, why waste time trying to quantify it?  The answer is that it doesn't help you make the decision, but it does focus attention on the objective basis (if any) for assessments of probability.  It forces you to bring your information, reasoning and judgements into the open, so that others can see them. 

In the above example, you and your partner are forced to reach a shared understanding of probability so that you can communicate it and also, to others in your report.  While this doesn't necessarily makes it easier for you to make strategic decisions, it does mean that whatever decsion you take will be based on the facts that are available - or draw attention to the need for more facts.  Expressing probability numerically is also likely to focus everyone's minds on the urgency of the issue, rather than letting them adopt whatever interpretation of "quite likely" suits their own values and priorities.

Another benefit is the potential for sensitivity analysis:  to assess how the impact of a particular risk changes with respect to changes in probability of a particular factor.  Bigger changes mean higher sensitivity.

To measure risk we have to use probability

To manage risk, we have to be able to measure it, and to measure risk we have to use probability.  Probability is the quantitative language of risk and uncertainty.

The probability of an outcome is a number expressing the likelihood of it actually happening.  It can be a number between 0 and 1, where 0 indicates an impossible outcome and 1 a certain one, or it can be expressed as a percentage (a number between 0 and 100).

In some situations, probability is objective and factual.  For example, the probability of calling the toss of a coin correctly is 0.5 or 50%.  However, tossing a coin is a very simple event.  It is easy to use past experience and real-world knowledge to assess the probability of a 'heads' or 'tails' outcome. 

As situations become more complex, it becomes progressively more difficult to be objective about probabilities; they become more subjective.  Business situations are extremely complex, and therefore the probabilities involved are highly subjective. 

Because the decisions we make in business are so important, it is vital to try and pin down the probabilities involved, even though it may be impossible to achieve complete objectivity.  The more precision we can bring to the situation, the firmer the foundation on which we make a decision.  To move towards precision, we need to look at subjective probabilities.

Business risk

Business risk

Business risk is the variability in a firm’s sales or in its ability to sell its product.

It is associated with the top of the income statement.

Business risk surfaces for a number of reasons.

1. For instance, consumer tastes may change.
   
2. An automobile company might introduce a new compact car at a time when people are looking for larger luxury cars or minivans.
   
3. A clothing manufacturer might be unable to react quickly to shifting fashion styles.
   
4. Business risk also arises from macroeconomic changes, such as

• a recession leading to reduced consumer spending, or
• high interest rates making people reluctant to buy houses.

Also read: Understanding Risk
Partitioning Risk
Business risk
Financial risk
Purchasing power risk
Interest rate risk
Foreign exchange risk
Political risk
Social risk

Business risk

As a holder of corporate securities (equity shares or debentures), you are exposed to the risk of poor business performance.

This may be caused by a variety of factors like

1. heightened competition,
2. emergence of new technologies,
3. development of substitute products,
4. shifts in consumer preferences,
5. inadequate supply of essential inputs,
6. changes in government policies and so on.

Often, of course, the principal factor may be inept and incompetent management.

The poor business performance definitely affects the interest of equity shareholders, who have a residual claim on the income and wealth of the firm.

It can also affect the interest of debenture holders if the ability of the firm to meet its interest and principal payment obligation is impaired. In such a case, debenture holders face the prospect of default risk.

Assessing Investment Risks using B-FLExCo

This is how I assess investment risks of the companies that I wish to invest in. I have shortened this to B-FLExCo.

This abbreviation stands for:

B = Business risk
F = Financial risk
L = Liquidity risk
Ex = Exchange risk
Co = Country risk (Also, known as political risk)

At the moment, there is significant political risk for those investing in the KLSE. Accordingly, many KLSE counters are trading at a discount reflecting this risk and other prevailing risks.