• Financial Maths

  • An overview of Corporate Finance
  • Basic Financial Terms
  • Economics
  • Mathematics
  • Portfolio Analysis
  • How to read Financial Data?

Risk

What is Risk?

Risk (incomplete definition)

Any transaction, business move or an asset of uncertain future value is called "Risk".

In Finance, every transaction or business move can be viewed as the buying or selling of risk.

For example, we buy a flat in Brighton, UK in the hope that we will sell it next year at higher price and exposed to the possibility that there is a property crash. So there is a risk that may be we loss some money. However, there is also a possibility of earning of some money.

Absence of Risk

Any transaction, business move or an asset which has a determined future value is called "Absence of Risk" or riskless transaction, business move or a riskless asset.

For example, we buy a government bond of $1000 and receive yearly $10 interest (coupon payment) until its maturity when we receive our original (principal) amount back.

Risk (complete definition)

Any transaction, business move or an asset which can return less than the same amount invested in a riskless investment for the same period is called "Risk".

Financial Mathematics
In the above example of riskless investment, the government bond is giving yearly coupon payment $10 and our principal back after maturity of the bond. So, we are receiving more money. But are we receiving more value for money?

Due to inflation $1000 today are more effective than $1000 at the time of maturity of the bond (when we will receive our principal $1000 back). So, although there is surety of earning more money (principal at maturity + yearly coupon payment), but there is risk of lossing value for money.