In our personal and business lives, we evaluate risk quite frequently. Some of us may not understand that we may be taking on risk that may not be prudent as we might not understand just what risk we are experiencing.
Though, the object is to evaluate the rewards for the given risks that we take. In a basic sense, we all know that crossing a street involves the minor risk of getting hit by a car. We this activity to get to experience the reward of getting to the other side of the street so we can get to where we are going. However, we try to minimize that risk by looking for oncoming cars as we go through this activity.
In a similar fashion, the process of evaluating risk (and the possible rewards) of something can be scaled up to be much more than crossing the street. We may compare the risk of buying something now that is a great deal as we may not be immediately using the item to waiting to buying until we need it as we may very well be paying more. Many of us may evaluate the particular risks and rewards of holding a particular investment in order to buy or sell it. We may also evaluate the rewards and risks of accepting a particular job offer as we evaluate the possible advancement opportunities, the distance it is away from where we live, how much it pays, etc. In business, analysts are always evaluating the risk of projects by calculating how long they expect the company to pay back their investment as well as the return that investment makes. Additionally, they may compare that return to the return of other projects. If the investment causes the company to issue bonds, it may evaluate the risk of putting additional debt onto the balance sheet.
Another interesting thought is there may be risk in activities we may perceive to be safe. In particular, we may think that money is safe and sound at a bank, but the reality is that money held at a bank still carries inflation risk. This has definitely hit home recently as inflation has spiraled upward, while most banks pay interest these days no greater than 0.85%. True, we all need to have liquid cash available for daily living expenses and this may be an appropriate place for some people to put money for people that may not want to take risks of investment vehicles that carry a higher potential return.
The idea is to take a moment and think about certain risks you are taking and see if the reward is good enough to you for the risk you may accept.
Though, the object is to evaluate the rewards for the given risks that we take. In a basic sense, we all know that crossing a street involves the minor risk of getting hit by a car. We this activity to get to experience the reward of getting to the other side of the street so we can get to where we are going. However, we try to minimize that risk by looking for oncoming cars as we go through this activity.
In a similar fashion, the process of evaluating risk (and the possible rewards) of something can be scaled up to be much more than crossing the street. We may compare the risk of buying something now that is a great deal as we may not be immediately using the item to waiting to buying until we need it as we may very well be paying more. Many of us may evaluate the particular risks and rewards of holding a particular investment in order to buy or sell it. We may also evaluate the rewards and risks of accepting a particular job offer as we evaluate the possible advancement opportunities, the distance it is away from where we live, how much it pays, etc. In business, analysts are always evaluating the risk of projects by calculating how long they expect the company to pay back their investment as well as the return that investment makes. Additionally, they may compare that return to the return of other projects. If the investment causes the company to issue bonds, it may evaluate the risk of putting additional debt onto the balance sheet.
Another interesting thought is there may be risk in activities we may perceive to be safe. In particular, we may think that money is safe and sound at a bank, but the reality is that money held at a bank still carries inflation risk. This has definitely hit home recently as inflation has spiraled upward, while most banks pay interest these days no greater than 0.85%. True, we all need to have liquid cash available for daily living expenses and this may be an appropriate place for some people to put money for people that may not want to take risks of investment vehicles that carry a higher potential return.
The idea is to take a moment and think about certain risks you are taking and see if the reward is good enough to you for the risk you may accept.
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