There are several sources of fundamental risk as being presented in the lecture note. They are identified as Business risk; financial risk; Liquidity risk; Exchange rate risk; Country risk and credit risk.
As discussed in our class, Business risk is the uncertainty over cash flows caused by the nature of a firm's business, example of which is the fluctuating demand for the firm's output.
Taking for example if Microsoft has to outsource to finance the whole company, it has to repay fixed financing charges such as interest expenses and return of principal amount before paying its shareholders. This then increases the risk of shareholders' investment due to the preference of distributing its assets.
Liquidity risk is the uncertainty over the ability to sell an investment in the secondary market which is Microsoft's ability to sell its asset or convert non cash assets to cash in order to finance the company.
Another risk connected in investment decisions is the Exchange rate risk or the uncertainty over the domestic currency value of a foreign currency denominated investment, which means that the value of the money varies with the currency of another country. The risk might be the value of the investment might go down or become lesser especially when it comes to currency conversion.
Country risk is also taken into consideration with regards to investment. This is the uncertainty over the political or economic environment in which the investment is located. ...