Risk
The possibility that an investment's actual return will differ from its expected return.
What is Risk?
In finance, risk refers to the uncertainty about the return on an investment — specifically the possibility of losing some or all of the original investment, or earning less than expected. Risk is not inherently negative: higher risk is associated with the potential for higher returns (the risk-return trade-off). Risk is typically measured using statistical concepts such as standard deviation (volatility of returns), beta (market sensitivity), and Value at Risk (maximum expected loss at a given confidence level). Key types include market risk (price fluctuations), credit risk (borrower default), liquidity risk (inability to sell an asset quickly), and concentration risk (excessive exposure to one asset or sector).
Example
From 1928 to 2023, the S&P 500 returned approximately 10% per year on average — but with enormous variability. In any given year, returns ranged from −43% (1931) to +53% (1954). This variability is the risk investors accept in exchange for the superior long-term return over low-risk alternatives like Treasury bills, which returned approximately 3.3% annually over the same period.