The risk of an investment is described by both the probability and the potential amount of loss.
The risk of an investment - the probability of an adverse outcome - is partly inherent in its very nature.
- A dollar spent on biotechnology is a riskier investment than a dollar used to purchase utility equipment.
- The former has both a greater probability of loss and a greater percentage of the investment at stake.
In the financial markets, however, the connection between a marketable security and the underlying business is not as clearcut.
- For investors in a marketable security the gain and loss associated with the various outcomes is not totally inherent in the underlying business;
- it also depends on the price paid, which is established by the marketplace.