Defining Risk Characteristics

Risk in Investing

Some basic defining characteristics of risk:

  • Risk is attenuated by diversification; however, diversification also increases exposure to risk. Thus, one can lose while gaining.

  • Risk is intensified by commercial competition, and reduced by lack thereof.

  • Risk is reduced by competence of enterprise management, or increased by lack thereof.

  • Risk is decreased by product (or service) usefulness and uniqueness, and the pricing freedoms accorded therefrom.

  • Risk is related to opportunity, which, according to the scale and the probability of its realization, mitigates or enlarges risk.

  • Risk is inversely related to understanding and attentiveness.

Stock price (as reflected in market capitalization) is the real world’s approximate equator of risk. In refinement and in common use, price (as an expression of expected returns) is related to the riskless return from high-grade, short-term credits. Risk rises directly with price and falls directly with price (unless one is trading instead of investing). At extremely low prices, nearly everything is riskless; at extremely high prices, nearly everything is risky.



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