Fundamentals of Financial Management, Third Edition

3.2 CONCEPT AND MEASUREMENT OF RISK

3.2.1 Sources of Risk

In finance, risk is normally associated with the volatility of returns from investment. The greater the volatility of returns, the larger is the risk involved therein. There are a host of factors that lead to such volatility. They are:

1. Uncertainty in the future course of the economy in general;
2. Inflation;
3. Operating risk at the micro level;
4. Political risk.

The most important source of risk arises from uncertainty regarding the future course of the economy in general. For example, a boom is a condition of the economy in which production, profits and income tend to rise. On the contrary, a downtrend occurs in these same variables during a depression. These conditions are influenced by a ...