Assessing Risk While Building a Portfolio

When dealing with investments, risk essentially refers to the chance that investments will decline in value. Obviously, this decline would result in a net loss, so risk can be considered the potential for loss. Risk takes many forms in the investing world. Every investment carries with it some degree of risk. To get an accurate picture of the risk associated with a given investment or portfolio of investments, the various forms of risk should be considered collectively. The result can be viewed with potential return in the context of a given investor's goals to determine if the investment is worthwhile.

Risk can also be assessed by tracking the volatility of a given investment.

Volatility is simply the tendency of the value of the investment to change. If the price of a stock moves up and down rapidly over short time periods, it is said to be volatile. If the price almost never changes, the stock is not volatile. As you might expect, the volatile stock is a riskier investment because its unpredictability makes it more likely to decline in value. In general, the more volatile the investment, the greater the chance of loss. At the same time, the more volatile investment may also be more likely to produce a large return. For this reason, risk and return must be carefully balanced.

The following list includes some of the many risk factors that should be carefully considered before investing.

By InvestorGuide Staff

Copyrighted 2020. Content published with author's permission.

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