Risk on investment is deviation of the actual outcome from the expected outcome. The more the deviation, the higher the risk or variance. ‘Aggressive’ or ‘high risk’ investment means that it has a potential to achieve higher returns because of greater volatility. ‘Moderate risk’ investment means that it will generate moderate returns and volatility will be lesser than one involved in a high risk investment. Similarly, a ‘low risk’ investment has a tendency to give stable returns with a minimal volatility.
Another important thing worth noticing here is that ‘how much of a loss one can bear or for how long he can accept his investment being below the principal value’ is called ‘risk tolerance’. Higher the investor’s risk tolerance, the greater is the potential for him to earn higher returns. In other words, if the client is willing to deal with the downside and can wait a few years for the returns to materialize, then he can expect a higher return from his investment portfolio overtime. Therefore, it must be ensured that risk is never spoken of in isolation; it must be discussed always in the context of higher returns for greater risk. When this is done, then the clients’ responses on risk become more balanced and meaningful.