def. Risk is related to the uncertainty in payment back when giving a loan.

  • Example of a riskless investment is investing into the bank upto the federal deposit insurance (~$100K)
  • Types of risk include:
    • Distance & Expectation Risk (=counterparty risk): the counterparty can fail to make the payment
    • Interest Risk: the market interest rate might change
    • Inflation Risk: the inflation is high so the money isn’t worth much
  • Increased cash flow frequency usually means less risk.

def. Risk in finance is equivalent to Standard Deviation in mathematics.