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    The Basics of Risk: Return

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    anne frank

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    The Basics of Risk: Return

    Uploaded by

    anne frank
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    risk

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    The Basics of Risk: Return

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    anne frank

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    © All Rights Reserved
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    Risk is defined in financial terms as the chance that an outcome or investment's

    actual gains will differ from an expected outcome or return. Risk includes the
    possibility of losing some or all of an original investment.

    Quantifiably, risk is usually assessed by considering historical behaviors and


    outcomes. In finance, standard deviation is a common metric associated with
    risk. Standard deviation provides a measure of the volatility of asset prices in
    comparison to their historical averages in a given time frame.

    Overall, it is possible and prudent to manage investing risks by understanding the


    basics of risk and how it is measured. Learning the risks that can apply to
    different scenarios and some of the ways to manage them holistically will help all
    types of investors and business managers to avoid unnecessary and costly
    losses

    The Basics of Risk


    Everyone is exposed to some type of risk every day – whether it’s from driving,
    walking down the street, investing, capital planning, or something else. An
    investor’s personality, lifestyle, and age are some of the top factors to consider
    for individual investment management and risk purposes. Each investor has a
    unique risk profile that determines their willingness and ability to withstand risk. In
    general, as investment risks rise, investors expect higher returns to compensate
    for taking those risks.1

    A fundamental idea in finance is the relationship between risk and return. The
    greater the amount of risk an investor is willing to take, the greater the potential
    return. Risks can come in various ways and investors need to be compensated
    for taking on additional risk. For example, a U.S. Treasury bond is considered
    one of the safest investments and when compared to a corporate bond, provides
    a lower rate of return. A corporation is much more likely to go bankrupt than the
    U.S. government. Because the default risk of investing in a corporate bond is
    higher, investors are offered a higher rate of return.2

    Quantifiably, risk is usually assessed by considering historical behaviors and


    outcomes. In finance, standard deviation is a common metric associated with
    risk. Standard deviation provides a measure of the volatility of a value in
    comparison to its historical average. A high standard deviation indicates a lot of
    value volatility and therefore a high degree of risk.

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