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Glossary

Risk

Risk is the chance that an investment's actual return will differ from what was expected, including the possibility of losing some or all of the money invested.

What Is Risk?

In investing, risk is the uncertainty about how an investment will perform. Returns are rarely guaranteed, so the actual outcome may be better or worse than expected. Risk is often described as the possibility of losing money, but it also includes the chance of earning less than planned or falling behind inflation. In general, investments with higher potential returns tend to carry higher risk, which is why investors weigh the two together.

Common Types of Risk

Investors often group risk into several categories:

  • Market risk: losses caused by broad movements in financial markets.
  • Credit risk: the chance that a borrower fails to repay a debt.
  • Liquidity risk: difficulty selling an asset quickly without accepting a lower price.
  • Inflation risk: the gradual erosion of purchasing power over time.
  • Interest rate risk: changes in rates that affect the value of bonds and other fixed-income holdings.

Risk can also be divided into systematic risk, which affects the whole market and cannot be removed by diversification, and unsystematic risk, which is specific to a company or industry and can be reduced by spreading holdings across many investments.

How Risk Is Measured

Several statistical tools help describe risk. Standard deviation measures how widely an investment's returns vary around their average, so a higher figure indicates more variability. Beta compares an investment's price movements with those of a broad market index. Because these measures rely on past data, they describe historical behavior and do not guarantee future results.

Why Risk Matters

Two personal factors shape how much risk is suitable for a given investor. Risk tolerance is the amount of price fluctuation a person can accept without abandoning a plan, while time horizon is how long the money is expected to stay invested. Risk cannot be eliminated entirely, only understood, reduced, or accepted. Recognizing the different forms of risk helps investors interpret why returns vary and why diversification is so widely discussed.

Updated October 21, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Diversification

Diversification is an investing approach that spreads money across different assets, sectors, or regions so that a poor result from one holding has a smaller effect on the whole portfolio.

Unsystematic Risk

Unsystematic risk is the portion of an investment's risk that affects only a specific company or industry, such as a lawsuit or management change, and can be reduced through diversification.

Standard Deviation

Standard deviation is a statistical measure of how widely a set of values, such as investment returns, spreads out around their average, with larger figures indicating greater variability and risk.

Beta

Beta is a measure of how much an investment's returns tend to move relative to the overall market, indicating its sensitivity to broad market swings.

Risk Tolerance

Risk tolerance is the degree of investment loss or volatility an investor is willing and able to accept in pursuit of potential returns.

Time Horizon

A time horizon is the length of time an investor expects to hold an investment before needing to use the money, and it shapes which investments are considered suitable.

Volatility

Volatility is a statistical measure of how much and how quickly an asset's price moves up or down over a given period, with higher volatility indicating larger price swings.

Return on Investment (ROI)

Return on investment (ROI) is a measure that compares the gain or loss from an investment to its cost, expressed as a percentage, to show how efficiently the money was used.