The higher the uncertainty, the higher the risk:

Fluctuations in value (variability in returns also causes risk)

Why assets go up and down:
Systematic risk factors – effect all assets in that class.
    T-bonds only have systematic risk.
    Stocks – not everything, Real estate – not everything
Non systematic or specific risk – effect company or industry as opposed to the market overall.

The smaller the company the more specific risk.

The larger the company the more systematic risk.

The weaker they are financially the more specific risk associated with the investment

CAPM quantifies risk and return - Used for expected rates of return

Types of Risk:

Specific risk - The risk associated with buying only one stock (the market has a good day but your stock doesn't).

Systematic risk – effect all assets in that class (the market has a bad day so your stock does too).

Interest Rate risk

Risk is the possibility of  a loss

Risk Categories:

 Dynamic – Associated with changes in the economy
 Static – With or without changes in the economy
 Pure – Chance of loss or no loss
 Speculative – Chance of loss or gain

Only Pure risks are normally insurable.

Ways to deal with risk:
     Avoid it
     Retain it
     Reduce it
     Transfer it
     Share it

Insurance transfers risk from individual to group

Gambling creates risk – Insurance avoids it

Rules of risk:

- Don’t risk more than you can afford to lose
- Consider the odds
- Don’t risk a lot for a little