Risk and Return Fundamentals

Risk and Return Fundamentals:


Risk and uncertainty are terms used to describe situations where the outcomes of decisions are not known with complete certainty. Risk is defined as the chance that the actual outcome will be unequal to the expected outcome.

As a general proposition, the greater the chance of low returns,the greater the risk of the investment. Two important points must be remembered.

Classification of risk:

Systematic Risk: Risk that cannot be avoided or minimized and that is out of control of an individual or a business enterprise.

Unsystematic Risk: Risk that cannot be avoided but can be minimized  by making intellectual decision based on best judgment relying on relevant information and that is to some extent under the  control of an individual or a business enterprise.

Business Risk: Risk related to overall business activities of a particular business enterprise that is mostly out of control of that business enterprise.

Financial Risk: Risk related to using of fund for forming and running business operations or making investments by a particular party that is under the control of that party.