Risk

AAA

DEFINITION of 'Risk'

The chance that an investment's actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment. Different versions of risk are usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. A high standard deviation indicates a high degree of risk.

Many companies now allocate large amounts of money and time in developing risk management strategies to help manage risks associated with their business and investment dealings. A key component of the risk mangement process is risk assessment, which involves the determination of the risks surrounding a business or investment.

INVESTOPEDIA EXPLAINS 'Risk'

A fundamental idea in finance is the relationship between risk and return. The greater the amount of risk that an investor is willing to take on, the greater the potential return. The reason for this is that investors need to be compensated for taking on additional risk.

For example, a U.S. Treasury bond is considered to be one of the safest (risk-free) investments and, when compared to a corporate bond, provides a lower rate of return. The reason for this is that a corporation is much more likely to go bankrupt than the U.S. government. Because the risk of investing in a corporate bond is higher, investors are offered a higher rate of return.

VIDEO

RELATED TERMS
  1. Event Risk

    1. The risk due to unforeseen events partaken by or associated ...
  2. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. ...
  3. Systematic Risk

    The risk inherent to the entire market or entire market segment. ...
  4. Market Exposure

    The amount of funds invested in a particular type of security ...
  5. House Money Effect

    The tendency for investors to take more and greater risks when ...
  6. Trading Rut

    A period of investing during which a trader fails to earn profits ...
Related Articles
  1. 5 Investment Risks Created By Global ...
    Home & Auto

    5 Investment Risks Created By Global ...

  2. Insure Your Future With A Career As ...
    Home & Auto

    Insure Your Future With A Career As ...

  3. Determining Risk And The Risk Pyramid
    Investing Basics

    Determining Risk And The Risk Pyramid

  4. Simplify Your Portfolio
    Options & Futures

    Simplify Your Portfolio

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center