Investment risk
Investment risk

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

Free course

Investment risk

5 Conclusion

In a financial context, risk is a synonym for uncertainty – the possibility that the actual outcome will differ from the mean expected outcome. It is therefore a neutral rather than a negative concept. Investors are risk-averse in the sense that they require more return for taking on more risk. Risk itself is measured by the standard deviation of actual returns around the mean expectation. In the real world, investment risk is created by a number of different factors that affect the certainty of returns in different ways and to different extents. The financial markets, and in particular the stock market, play a crucial role in the control and diversification of risk. They provide a means whereby investors can get their money back by selling on their interests to other investors. This resolves a conflict of interest between firms (which want to keep the use of resources for as long as possible) and investors (who accept a lower return if they can see the opportunity for an early exit).

Having established a fair return for a particular investment (in terms of time preference rate, allowance for inflation and risk premium), we can use this as a discount rate for establishing the present value of expected cash flows. If this exceeds the price demanded by the market, the investment offers a positive net present value and should be acquired. If the present value is less than the price demanded, the investment is relatively expensive and should be passed over. This rule of positive net present value is the dominant rule in financial decision-making.


Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to University-level study, we offer two introductory routes to our qualifications. You could either choose to start with an Access module, or a module which allows you to count your previous learning towards an Open University qualification. Read our guide on Where to take your learning next for more information.

Not ready for formal University study? Then browse over 1000 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus371