Chapter: Risk & Return

Risk: A preliminary definition of investment risk is the probability that return will be less than
expected. Risk is the probability than actual return will deviate from the expected return.

Risk for an investor is the chance (probability) that the return on an investment will turn out to be
less than he or she expected when the investment was made.

Uncertainty: Uncertainty means that something favorable or unfavorable event may occur in
future.

Risk vs. uncertainty: Risk can be understood as the potential of loss. It is not exactly same as
uncertainty, which implies the absence of certainty of the outcome in a particular situation. So, in
short, risk describes a situation, in which there is a chance of loss or danger. Conversely,
uncertainty refers to a condition where you are not sure about the future outcomes.

BASIS FOR RISK UNCERTAINTY

COMPARISON
Meaning The probability of winning or Uncertainty implies a situation
losing something worthy is where the future events are not
known as risk. known.
Ascertainment It can be measured It cannot be measured.
Outcome Chances of outcomes are known. The outcome is unknown.
Control Controllable Uncontrollable
Minimization Yes No
Probabilities Assigned Not assigned

Unsystematic risk: Unsystematic risk (also known as "firm-specific risk or diversifiable risk") is
the type of risk that arises due to the events or behavior specific to the firm. Unsystematic risk
can be reduced through diversification. For example, news such as a sudden strike by the
employees of a company you have shares in, is considered to be unsystematic risk.

Unsystematic risk has two types:

Business risk: business risk is the inherent uncertainty associated with the firm’s nature of …

Systematic risk: Systematic risk (also known as "market risk" or "un-diversifiable risk"), is the
part of risk associated with economic or market factors that systematically affect all firms. Also
referred to as volatility, systematic risk consists of the day-to-day fluctuations in a stock's price.
This risk cannot be eliminated through diversification.