The method of measuring a risk is to collect a large number of similar cases subject to risk and then divide the number of time the risk has happened by the number of such cases. The greater the risk, the higher must be the expected gain in order to induce them to start the business.

Every business involves some risk and most people do not like being involved in any risky enterprise. Risk is an objectified uncertainty or a measurable misfortune. Risk may be defined as an uncertainty of financial loss on the occurrence of an unfortunate event.Ī risk is an uncertainty of loss.

The concept ‘risk’ is a situation in which the probability distribution of a variable is known but its actual value is not. For a normal risk averter they will be convex towards the lower right hand side of the diagram. A set of indifference curves can be drawn on the diagram, their shape depending on the individual’s attitude towards risk. If there is only one other possibility then the line between the certainty point and investment point will give the possibilities between which a person can choose by diversifying his portfolio. The other investment possibilities are also placed on the graph. This is represented by a point on the vertical axis, that is, zero variance. There is usually once certain alternative for instance, holding money at a fixed interest rate. The individual’s choice as to how he will arrange his investments can be plotted on a graph with the expected return on the vertical axis and the variance on the horizontal. In this model, it is assumed that the determinants of an individual’s choice are the expected return and the variability of the return.

It is particularly used in examining how an investor will organise his portfolio. The making of decisions when there is uncertainty in the outcome.

Risk probability formula