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Understanding Risk and Uncertainty

A Short Paper on Risk & Uncertainty by Ernie

Risk as it relates to investing is an event that unfolds to induce impairment or loss of capital.

There are many types of risk. To name a few, there are financial, market, economic, systemic and portfolio risk. Generally speaking, risk causes volatility in the stock market, but it doesn’t necessarily result in permanent loss of capital.

Uncertainty

Uncertainty as it relates to investing is the inability to assess the magnitude of a given outcome in which an event can take place.

Risk and uncertainty go hand in hand, which means that both need to be managed together. The ability to identify concentrations of risk and knowing the magnitude of any outcome should profitably reward the investor for taking low risk.

It is far better to go for the easy money by stepping over the one foot bars and be rewarded handsomely than stepping over ten foot bars and be punished for it.

Exploring the unknown requires tolerating uncertainty. Brian Greene

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