Risk is the probability of a negative outcome. It is a major consideration when deciding whether to make an investment. A high level of risk is associated with a high standard deviation for the expected return associated with an investment, while a low level of risk is associated with a low standard deviation for expected returns. A business may still elect to make an investment when the associated risk level is high, if the expected returns are also expected to be high. For example, a firm might decide to invest in a country that has a high risk of asset expropriation, if the profits to be earned are also high. In these cases, a business may engage in several risk mitigation tactics, such as altering procedures, outsourcing activities, and buying insurance. In some cases, a business is not willing to take on risk, and so will invest in securities that are considered to be risk-free, such as issuances of the United States government.
There are many types of risk, including the following: