Which of the following best describes investment risk?
a) the probability of achieving an improbable event.
b) the possibility of making a profit.
c) the potential variability in future cash flows.
d) the chance that a security will materialize.
Risks and Returns:
Risk is the probability that an investor will receive returns that are lower than the anticipated returns. Investment with high returns are associated with high risks while investment with lower returns are associated with low risks.
Answer and Explanation:
The correct answer is (c) the potential variability in future cash flows.
Investment risk is the risk that future cashflow will vary. In all investments, there are risks that are involved. Risks are broadly categorized two two:
- Business risks.
- Financial risks.
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Learn more about this topic:
from Finance 305: Risk ManagementChapter 3 / Lesson 3