Monday, December 12, 2016

The meaning of risk in financial term

The meaning of risk in financial term is a bit different from the way we use it in normal life.

Even though there are many different aspects of risk in financial terms, we are talking about the risk in relation to the return of an investment.

When we say risk in finance, we are talking about mathematics.

That means you can use a formula to calculate the risk factor.  This is known as standard deviation. 

The risk factor starts from using a risk free factor.  In financial term, risk free asset refers to the government bond guaranteed by the government. 

The return is low because it is assumed that government will not default on payment.

That is why when you talk to an investor about risk, you have to define on the risk that you are talking. 

There are so many different types of risks involved, such as currency risk, sovereign risk, inflation risk, credit risk and others.

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