Risk

Key Takeaways

1. The difference between the actual return on investment and expected return on investment is considered as the risk.
2. Risk management is the identification of sources of risks, assessment of the risk, and controlling the exposure by developing the strategies to reduce the impact of the risk on the growth of the business.
3. Worldwide most of the banking institutions adopt the Basel Accords for identification, assessment, and controlling exposure to credit, market, and operational risk.

Risk in finance and investment refers to the unfavourable outcome with an investment or financial asset.

Risk measures the exposure to potential loss which an investor has on a financial instrument.

Standard deviation is a common metric used to measure risk in finance. The standard deviation gives a measurement of how volatile asset prices are in relation to their average historical values over a specific time period.

However, by comprehending the fundamentals of risk and how it is calculated, it is possible to manage investment risk. All types of investors and business managers will be able to prevent unnecessary and expensive losses by becoming aware of the risks that can apply to various scenarios and some of the holistic management techniques for managing them.

Example

Whenever we make investments in any financial security, we run the risk of, say, the market crashing, which would lead us to lose money by eroding the value of our investment.

Know more

The total risk on any investment is made up of two parts — systematic and unsystematic risks.