How is risk commonly defined in finance?

In finance, risk is commonly defined as the possibility that actual returns differ from expected returns. This definition encompasses the uncertainty associated with the outcomes of an investment, acknowledging that while investors have projections or expectations based on historical performance or market conditions, the actual returns can deviate from these predictions due to a variety of factors such as market volatility, economic changes, or company performance.

Understanding this concept is crucial because it highlights that risk is not inherently negative; instead, it reflects the uncertainty surrounding potential investment outcomes. A higher risk usually indicates a wider range of possible returns, meaning there are more chances for significant gains but also for substantial losses. This definition aligns closely with the fundamental principles of financial theory, where the assessment of risk is essential for making informed investment decisions and for portfolio management.

While other choices touch on aspects of risk, they do not encapsulate the full scope of its definition as effectively. The chance of losing money in investments is a narrower view that doesn't address the possibility of both gains and losses. The potential for high returns and the variability in investment outcomes are related concepts, but they do not specifically define risk itself. The comprehensive understanding of risk includes recognizing the uncertainty and variability in outcomes, which is best captured by the possibility that actual returns differ from