Quantifying Risk associated with an Investment

When making an investment, one of the prime question asked is “What’s the return expected from this investment?”

Higher the return, more lucrative the investment looks to be.

Though, a smart and experienced investor also assesses the risk associated with an investment before giving a nod to it.Here, lets try to correlate ‘Risk’ as well in terms of ‘Returns’ from an investment by defining the ‘Risk’ as ‘The Lowest Return Rate Possible from an Investment’.

Let’s say, expected return rate from an investment is 10%, but the lowest return which the investment has given in past is 4%. Then this 4% could be a measure of or reflection of risk associated with this investment, giving another perspective to the investor so that she can decide if she would want to invest or not.

Note that this lowest rate of return can also be negative too, say, -10% which shows that there’s a chance of you loosing your principal amount as well. There can be cases where this rate can be -100% which means that there’s a possibility of loosing your entire amount and if this is beyond -100% then that shows it can get you in debt too.

Hence, its a good idea to assess the risk of an investment before getting into it, and moreover, quantifying this risk as the lowest rate of interest can help in better understanding the possible worst case scenarios associated with the investment.


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