Final answer:
Rating organizations focus on the risk of default, which pertains to the borrower's failure to meet payment obligations. High-risk levels have historically harmed investment portfolios, as seen in the 2008 financial crisis. Investors must weigh the trade-offs between return, risk, and liquidity.
Step-by-step explanation:
Rating organizations are primarily concerned with the risk of default when assessing different types of investments. Investments can be analyzed based on their expected rate of return, the risk that the return will be much lower or higher than expected, and the investment's liquidity. Default risk is specifically the risk that the borrower will not repay the bond or loan as agreed. This type of risk is integral to bond investments and affects the interest rate and the risk premium associated with a bond.
Throughout history, a high risk level has proven to be detrimental to an investment portfolio particularly during economic downturns or when unexpected events occur, that significantly affect the financial markets. For instance, during the 2008 financial crisis, high-risk mortgage-backed securities led to significant losses for investors. The trade-off between return and risk means that while investments with high returns also come with higher risks, particularly in the short term, liquidity can be an advantage if the investment can be readily sold for spendable money.