Money, Banking and finacial marketsExplain the following: Risk results from the fact that more outcomes could happen than will happen.

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kplhardison's profile pic

Karen P.L. Hardison | College Teacher | eNotes Employee

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Investing in corporations involves weighing many factors: market strength, price-to-earnings ratio, assets versus liabilities, and many others. Each of these variables might produce adverse (bad) outcomes for the investor. There are many avenues of potential outcome. Odds are not every potentiality will happen. Odds are there are many more possible outcomes than will actually happen. Risk is accessed by the potentiality (many adverse outcomes) of outcomes.

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belarafon | High School Teacher | (Level 2) Educator Emeritus

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Risk is the possibility of failure vs. the possibility of success. If there was no possibility of failure, there would be no risk. What "might" happen is different than what "will (likely)" happen; the "might" is the risk, while the "will (likely)" gives assurance of success without direct guarantee. We assume a certain amount of risk and weigh our gut feelings and the advice of experts against the history of the risk. If the risk is lesser than our gut, we go for it.

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accessteacher | High School Teacher | (Level 3) Distinguished Educator

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Risk is an essential term in today's world, and to be aware of the risks means that you have to take into account the many possible different outcomes of something before making any decision. This means that in terms of assessing risk, all the possible outcomes are more important than what does actually end up happening.

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lmetcalf | High School Teacher | (Level 3) Senior Educator

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The above posts explain your statement very well. I would add that there are risks you can anticipate, and you can make decisions on investments based on those known possible outcomes, but there also risks that come from factors that you could never reasonably anticipate. For example, you know that there is a risk in investing in real estate in our current depressed housing market, and you can make decisions based on your comfort with those risks. But you could wouldn't likely factor in some "crazy" possible risk such as to whether a tornado is going to come through and completely blow away that house. You might take on the risk that the housing market isn't going to recover soon, but you wouldn't likely factor in random weather risks into that same investment.

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readerofbooks | College Teacher | (Level 2) Educator Emeritus

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This a convoluted sentence, but the essence is as follows. The more possible outcomes, the greater the risk. So, for example, if you are playing roulette at a casino and there is a 1 in 37 chance of winning, then your risk is 1 in 37. If you have a larger wheel (for the sake of argument), then your risk is greater, because there are more possible outcomes. This logic can be used in other areas as well. The greater variance of outcomes, the greater the risk will be.

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rrteacher | College Teacher | (Level 2) Educator Emeritus

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Many things could happen, and in the business context of this question, it is important to understand that investors best insulate themselves from risk by diversifying, or putting their money in different types of investments. This not only spreads the risk around, which is what insurance companies do, it minimizes the risk that would occur if something affected the value of one sector of the economy.

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litteacher8 | High School Teacher | (Level 3) Distinguished Educator

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Only one thing is actually going to happen, if you look at it that way.  At least only one thing can happen at a time.  The risk is that you might think something is going to happen and something else happens, or that something you think will happen will not happen, or that something unexpected happens.

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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If we know what will happen, there is no risk.  If there is only one possible outcome, no matter how bad, we know what it is and there is no risk.  If we know a company will go broke, we simply don't invest in it.  No risk.  But if lots of different things could happen to the company, we don't know which result will happen and we have risk.

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