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Cyclical Risk

Cyclical risk refers to the potential for a company’s performance to fluctuate due to changes in the broader economic cycle. Cyclical industries are particularly vulnerable to recessions, economic slowdowns, or shifts in consumer demand, which can negatively affect revenues and profits. Investors in cyclical stocks must be aware of the risk that downturns in the economy could lead to significant declines in a company’s performance.

Example

An airline faces cyclical risk as demand for travel tends to decrease during economic downturns, leading to lower ticket sales and revenue.

Key points

• Cyclical risk is the risk that a company’s performance will fluctuate with the economic cycle.

• Companies in cyclical industries are vulnerable to recessions and economic slowdowns.

• Investors in cyclical stocks face the risk of significant performance declines during downturns.

Quick Answers to Curious Questions

Cyclical risk refers to the potential for a company’s performance to be negatively affected by economic downturns or recessions.

Industries such as automotive, travel, construction, and consumer discretionary sectors are highly exposed to cyclical risk.

Investors can manage cyclical risk by diversifying their portfolios with defensive or non-cyclical stocks, which are less sensitive to economic cycles.