Risk in finance means that the actual return on investment can be lower than the expected return or it can even be a situation where you have to face a loss. Risk is important for the growth of a firm because with the same policies and without implementing any changes, a business can’t expect to earn higher returns. The higher is the risk, the higher is the expected return. Similarly, the lower is the risk, lower is the expected return.
Risk can never be separated from returns. Investment and risk go hand in hand. Where there is an investment, there is a risk associated with it. The concept behind this is the risk-reward concept, which states that greater the risk an investor takes, higher the profits he earns.
Returns in the extreme situations can be gaining more than expected or can even be losing the original investment. It is the money that is either made or lost in investment. This is a process every business venture has to go through, therefore it is important to analyse the risk ratio for that given company before investing.
Outcome of following this practice:
Positive-Earning a profit from an investment.
Negative-Bearing a loss.