How is the risk of an investment determined?

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Financial lexicon Financial lexicon

When you talk about investment risks, you talk about uncertainty or change.

Financial investment risk actually means being able to accept a certain degree of uncertainty about future events or the possibility that the value of your own investment will change over time. Hence not only losses, but also possible gains.

Risk as opportunity

Especially on the basis of the points mentioned above, it is important to clarify that risks in the financial sector are not just a danger. Although only negative characteristics are ascribed to the term risk in the collective imagination, in the financial sector this can also be understood as an opportunity.

The risk of an investment transaction therefore arises from the eventuality that a financial asset will experience a change in elements that determine its return.

The key concept of risk is volatility, which is the chance that returns will move close to expected value. In financial circles, this indicator is known as volatility. The statistical indicator that measures this trend is the root mean square deviation, or standard deviation.

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