Risk: What is it?

In finance, we define risk as 'the chance that an outcome will vary from expectations.'

Risk can be positive or negative.  While most of us think of risk as 'the chance of a loss', it can also mean 'the chance of a gain'.

For example, at the end of the week, you expect to receive a payment of $100, but there is a risk of 10% variance with it.  After one week, you will receive from as little as $90 (a 10% loss), to as much as $110 (a 10% gain).  

When dealing with investments, everyone has a different appetite for risk.  While some of us are unwilling to accept risk, others happily take on more and more.  Investors can be put into three broad categories:

Risk Averse - Investors do not like risk, and will take measures to remove it.  They prefer reliable stable returns.

Risk Neutral - Investors are willing to take on some risk.  They generally have a blend of stable and risky investments.

Risk Seekers - Also known as 'Risk Lovers' like risk, and tend to focus on more speculative investments.  Risk seekers would be willing to take on additional risk if it increases their expected returns from less risky investments. 

Risk management is an area of finance, which deals with risk and helping people achieve their desired exposure to risk.