There is no such thing as free lunch. Nowhere is this truer than in the world of investments. When it comes to investing, gaining access to higher returns comes at a price. And that price is called risk. In investments, risk is commonly defined as the possibility and magnitude of incurring a loss. But actually, risk can be more broadly defined as the possibility of obtaining something other than what you expected. So, risk can actually work in your favor. In terms of investments, you could end up with a return that is higher than what you initially expected because of the riskiness of investment. In fact, in investments, the following relationship holds true: the higher the return, the higher the risk.
All this talk of risk may sound frieghtening. Does it mean that you should avoid risk? Especially when it comes to your hard-earned savings? The answer to that question is resounding..."it depends". The amount of risk that you are willing to take and are capable of taing is called your risk tolerance. Your risk tolerance is a function of several factors that are unique to you and is thus different from the risk tolerance of another person.
Source Philequity Management
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