Risk is an inherent part of everyday life. It’s a concept that affects every decision made and can be a determining factor in each individual’s success or failure. Put simply, risk is the probability of experiencing an outcome that is different than the expected one.

Risk is used to refer to a number of different phenomena. Investing is an area where risk almost always comes into play; an investor taking a risk may expect to achieve a gain in return for that risk, an expected outcome that may or may not be achieved. In a broader sense, risk could be applied to an individual’s choice to move to a different city or change jobs, or even someone deciding to go outside for a walk during a thunderstorm.

Investor’s risk is generally divided into two broad categories: market risk and credit risk. Market risk is the risk associated with fluctuations in the market that can lead to losses in the value of an investment, due to its inherent volatility. Credit risk is the risk that an entity may default on its liabilities, or its inability to pay back what it has borrowed. This could be caused by a variety of factors, such as a decrease in their income, a change in their interest rate, or even an increase in overall risk in the company due to market conditions.

Risk can also be quantified by calculating its expected return, or the amount of money that can be expected as an outcome or reward for taking on a certain risk. This is typically measured on a risk-adjusted return (RAR) basis, which adjusts the return for the degree of risk taken on.An important concept in the assessment of risk is diversification, the practice of allocating capital to multiple entities or investments. This helps to reduce the exposure to specific risk, and can lead to greater overall returns and lower risks. Hedging is another popular risk management technique, which involves taking positions in different securities that are negatively correlated, to reduce any potential losses.

Overall, risk is an ever-present concept, whether in the stock market, in everyday life, or in any type of investment. It’s important to understand the risks associated with any investment or decision in order to ensure safety and maximise potential rewards. By investing in a diversified basket of assets, taking advantage of hedging strategies, and by calculating risk-adjusted returns, individuals and businesses can reduce the risk associated with their investments and increase their opportunities for success.