What is risk?
"Simply put, risk is uncertainty. The more risk you take, the more you stand to lose or gain. You cannot expect high returns without taking substantial risks."
Tossing a dice, is at basic level a risky endeavor. The outcomes are thrown open to uncertainty. You take risk everytime you act, from crossing the street; to buying a stock. Generally when people talk about risk, they focus on financial risk. In terms of finance, it is the risk that a company or individual could lose some or all of the original investment, possibly resulting in inadequate cash flow to meet financial obligations.
The concept of risk is not a simple concept in finance. You cannot make wise investments without first considering risk. To be successful, every investor must be able to identify and understand the types of risk they face across their entire portfolio. Measuring risk is just as important as measuring returns.
In the financial world, risk is often expressed as volatility of returns. Volatility measures how variable outcomes are likely to be. Standard deviation is a general statistical measure of volatility. It measures historical variability of returns from their mean. A higher standard deviation implies more variable and uncertain returns. Measuring risk on a portfolio basis shows how well diversified your investments are, where the largest gains and losses are likely to be concentrated, and how your risk profile compares with that of your peers. Ultimately, the greater transparency achieved through measuring risk will help you make more informed investment decisions.
The patterns of any particular investment will detail the relative risks and rewards undertaken with each investment. Risk focuses on the future and our ability ...