Risk

Risk (in Finance): In finance, risk represents the possibility that actual outcomes may deviate from expected results, impacting returns on investments. The Capital Asset Pricing Model (CAPM) defines risk in terms of volatility—the degree to which investment returns fluctuate over time. According to the risk–return tradeoff principle, investors require higher expected returns to compensate for taking on greater levels of uncertainty. This concept helps in evaluating investment opportunities and balancing portfolios between low-risk, low-return and high-risk, high-return assets.

Example: Investing in government bonds involves low risk and offers modest returns, while investing in startups or equities carries higher risk due to market volatility but also the potential for significantly higher returns.