Risk Risk isk is one of the most misunderstood notions on Wall Street. This is paradoxical because a primary purpose of the financial services industry is the control of financial risks .
Risk is an objective notion.
Expected excess returns are proportional to risks taken. For example, if a man jumps out of an airplane with a parachute on his back, he may be uncertain as to whether or not the chute will open. He is taking risk because he is exposed to that uncertainty if the chute fails to open, he will suffer personally. In this example, a typical spectator on the ground would not be taking risk. They may be equally uncertain as to whether the chute will open, but they have no personal exposure to that uncertainty.