What is Risk?
Risk is the uncertainty surrounding outcomes. We may also refer to it as ‘volatility’ around results. It is possible the investor would not be able to get the desired returns. The uncertainty can go both ways (positive and negative), but the investors are more concerned about the adverse outcomes.
Example of Risk
There are various types of Risk; the most commonly used example in the banking sector is ‘Credit Risk’. The core operations of a Bank involve lending out money to governments, corporates and individuals. When the Bank lends out money, there is always a possibility the debtor gets default and does not return the money. Here, the Risk of not getting the money back is an example of Risk in a financial term.
Why is it essential to know Risk?
The definition of Risk forms the foundation of Risk Management. The purpose of Risk varies from sector to sector and organisation to organisation. Hence, it is critical for Risk Professionals to understand the concept of Risk well.