ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Risk can be defined as uncertainty concerning the actual return that an investment will generate. Business risk resulting from uncertainty over a firm’s earnings is a concern for stockholders, but not for debt holders. Historical returns are of no use in estimating the risk of an investment.

Detailed explanation-2: -Risk-the uncertainty that an investment will earn its expected rate of return. To compute the expected rate of return, the investor assigns probability values to all possible returns. These probabilities range from zero (no chance) to one (complete certainty).

Detailed explanation-3: -A risk may be taken or not, while uncertainty is a circumstance that must be faced by business owners and people in the financial world. Taking a risk may result in either a gain or a loss because the probable outcomes are known, while uncertainty comes with unknown probabilities.

Detailed explanation-4: -First is the principle that risk and return are directly related. The greater the risk that an investment may lose money, the greater its potential for providing a substantial return. By the same token, the smaller the risk an investment poses, the smaller the potential return it will provide.

Detailed explanation-5: -In the financial world, risk refers to the chance that an investment’s actual return will differ from what is expected-the possibility that an investment won’t do as well as you’d like, or that you’ll end up losing money.