Newsletter Subscribe
Enter your email address below and subscribe to our newsletter
What is Investment Risk?
Investment risk refers to the possibility that the actual return on an investment will differ from the expected return, including the potential loss of some or all of the invested capital.
Definition
Investment risk is the uncertainty associated with investment outcomes, reflecting the likelihood of financial loss or variability in returns.
Key Takeaways
- All investments involve some degree of risk.
- Risk varies by asset class, time horizon, and market conditions.
- Effective risk management balances risk and return.
Understanding Investment Risk
Investment risk arises from multiple sources, including market volatility, economic conditions, interest rate changes, inflation, and company-specific factors. Higher potential returns are generally associated with higher levels of risk.
Investors assess risk based on their objectives, time horizon, and tolerance for volatility. Diversification, asset allocation, and risk assessment tools help manage exposure while pursuing desired returns.
Understanding investment risk enables better decision-making and more resilient portfolio construction.
Types or Variations
Market Risk: Losses due to overall market movements.
Credit Risk: Risk that a borrower fails to meet obligations.
Liquidity Risk: Difficulty selling an investment quickly without loss.
Inflation Risk: Erosion of purchasing power over time.
Currency Risk: Exposure to exchange rate fluctuations.
Real-World Example
An investor holding only technology stocks faces higher market risk compared to a diversified portfolio that includes bonds, real estate, and international assets.
Importance in Business or Economics
Investment risk influences capital allocation, portfolio design, and financial stability. For businesses and investors, understanding risk is essential for sustainable growth, valuation, and long-term planning.
Related Terms
- Risk Tolerance
- Portfolio Diversification
- Volatility
Sources and Further Reading
- Investopedia
- Organisation for Economic Co-operation and Development (OECD)
- International Monetary Fund (IMF)
Quick Reference
- Core Issue: Uncertainty of returns.
- Key Trade-Off: Risk versus return.
- Management Tools: Diversification and asset allocation.
Frequently Asked Questions (FAQs)
Can investment risk be eliminated?
No. It can be reduced but not completely eliminated.
Are higher returns always linked to higher risk?
Generally yes, though some strategies aim to improve risk-adjusted returns.
How do investors measure risk?
Using metrics such as volatility, beta, and value-at-risk (VaR).
