Overview of Risk
Risk and Risk Management
Risk is the probability of the undesirable outcomes. Risk management is the process by which one minimises the probability, or severity, of undesirable outcomes (i.e. permanent loss of capital).
At first glance the concepts of risk and risk management appear straightforward. However, this couldn't be further from the truth as one is dealing with the intractability associated with:
- modelling uncertainty, and
-
the subjectivity in determining how
undesirable
an outcome may be.
Due to this complexity, the specifics of how risk is understood, measured, and managed varies between different fields. In fact, there is an entire scientific discipline called actuarial science that deals exclusively with modelling and mitigating risk in finance, insurance and other industries.
Risk in Investing
In investing, risk is the probability of the permanent loss of capital. The probability of which may increase or decrease due to systematic or unsystematic events. Hence, investment risk is further divided into systematic and unsystematic risk. This is done as different mitigation strategies are required for the different sources of risk.
Investment risk is also commonly associated with price volatility; however, in most circumstances, this is not the correct construal.