Risk is a measure of what?

Risk is fundamentally understood as a measure of uncertainty regarding the distribution of various possible outcomes. In finance, when investors assess risk, they look at the potential variability in returns on an investment or the likelihood that actual outcomes may vary from expected ones. This uncertainty can stem from a multitude of factors, including market fluctuations, economic conditions, and individual asset characteristics.

By emphasizing the uncertainty in outcomes, this viewpoint acknowledges that not all future events are predictable, and there are numerous scenarios that could play out, affecting the investment's performance. Investors seek to understand this uncertainty in order to make informed decisions about how to allocate their resources.

While the concepts of probability, historical volatility, and the relationship between risk and return are important aspects of financial analysis, they are subsets of the broader concept of risk itself. The focus on uncertainty captures the essence of risk in the context of financial decision-making.