Risk

1.

In the corporate finance context, risk refers to the variability of potential future returns.

It is often quantified as the standard deviation of future returns.

It is often estimated by the standard deviation of historic returns, though this process is inherently error-prone when used for forecasting or risk management purposes.

2.

In the Capital Asset Pricing Model, relevant risk is measured by beta.

3.

In a more general sense, risk refers to the unknown (or unknowable) nature of future outcomes involving, for example, market prices or market rates.

4.

The possibility of adverse effects resulting from changes in market prices or rates, or from changes in other general conditions in the market, or from other economic factors specific to the business or other organisation (such as the failure of a key supplier).

5.

The possibility of an event occurring that will have an impact on the achievement of objectives.

This includes both the upside opportunity and the downside hazard which could either move us towards or drive us away from achieving our objectives. Risk is measured in terms of impact and likelihood.

No organisation can eliminate all risk, so risk has to be managed effectively. This is best done through a risk-aware culture.

See also

• Alienation of assets
• Beta
• Capital asset pricing model
• Capital risk
• Commercial credit risk
• Commodity risk
• Counterparty risk
• Delivery risk
• Downside risk
• Insurance
• Legal risk
• Market risk
• Regulatory risk
• Return
• Risk averse
• Risk management
• Standard deviation
• Tax risk
• Transfer risk