What is RISK??

Risk is defined as the chance that the actual return from an investment may differ from what is expected (Gitman, Joehnk 2005).  In the financial world, risk and return are commonly used terms when speaking about investing. 

There is a clear relationship between risk and return.  The risk-return tradeoff explains this relationship.  This simply is the relationship between the two where investments with more risk should provide higher returns or those investments with less risk provides lower returns (Gitman, Joehnk 2005). 

There are many types of risk involved with investing.  Some of these types of risk include: business risk, financial risk, purchasing power risk, interest rate risk, liquidity risk, tax risk, market risk, and event risk.  All of these examples of risk sources are highly analyzed by the investor.  

What is RISK MANAGEMENT??

Risk management is defined as “the process of analyzing exposure to risk and determining how to best handle such exposure” by Investorwords.com (2005).

Risk management involves careful research of the investment.  By understanding all aspects involved in the potential investment, one can analyze the data and the associated risks and make a sound decision as to whether or not the investment is right for him or her.  

Risk management is vital to aggressive investors as well as moderate investors.  By managing investment risk, one can maintain a healthy investment portfolio.

 References

Gitman, L. & Joehnk, M. (2005). Fundamentals of investing (9^th ed.). Boston, MA: Pearson Education.

Investorwords.com.  (2005).  Risk management.  Retrieved January 5, 2005.  http://www.investorwords.com/r4.htm#riskmanagement