Risk management involves identifying and analysing the risks involved, and then choosing whether to accept this risk or make changes to avoid the risk. This process is one we carry out daily, from crossing the street to engaging with a stranger, however, in this realm we’re looking at it from a finance/investment point of view.
If you have a fund manager or financial adviser, they will generally be responsible for calculating and communicating the risks associated with any type of investment. This will cover the potential returns as well as the potential risks to your capital.
For example, investing in an emerging asset will hold a lot more risk than buying the stocks of a well-established institution. It’s worth noting that high risk doesn’t necessarily equate to a negative, typically assets with higher levels of risk bring about higher levels of return (high risk, high reward).
Each person’s level of risk will vary from one to another and should be decided prior to making any investments. Once this is established, your investment portfolio will work within those realms so as to manage that level of risk.
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