Define risk. Give an example of a risk-free investment and explain why

Define risk. Give an example of a risk-free investment and explain why you claim it has no risk. Give an example of a risky investment and explain why you claim the investment to be risky.

What will be an ideal response?

ANSWER

Answer: Risk is a measure of the uncertainty in a set of potential outcomes for an event in which there is a chance of some loss. The typical risk-free investment example is Treasury bills because the investor knows with certainty the amount and timing of the investment payoff. In all states of the world, an investor in Treasury bills will receive the face value of the investment. Risky investments have uncertain outcomes. Stocks, bonds, commodities, real estate, and many other types of investments provide uncertain returns. Some investments have returns that vary only by small amounts across states of the world, while others vary much more from very negative to very positive.