Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. A science has evolved around managing market and financial risk under the general title of modern portfolio theory initiated by Dr. Harry Markowitz in 1952 with his article, “Portfolio Selection”. Asset-backed risk is the risk that changes in one or more assets that support an asset-backed security will significantly impact the value of the supported security. Risks include interest rate, term modification, and prepayment risk.
An asset-backed security is a security backed by the cash that comes from numerous assets. The financial security is backed by student debt, leases, car loans, credit card debt, and more. Typically, the assets of an asset-backed security are not liquid and can’t really be sold on their own. It has many advantages to both the lenders and investors. For example, it allows lenders to make a profit by increasing the lending and at the same time it encourages investors to invest their money into different assets that will benefit them.