Risk, what is it, really? Risk is a reality that exists in all aspects of life, itís that simple. When it comes to your finances, risk is defined as the potential loss of capital. Itís also referred to as volatility and divergence from a specific index or fund benchmark. Letís drill down into this concept further.
Volatility is a measure of how an investment varies from its average over time. The problem with equating risk as volatility is that the relationship between an investmentís price and its intrinsic value is underestimated. For the most part, itís an indication of the fluctuation in perceived value, which is based on past return patterns and doesnít take into account other threats that may influence returns such as a companyís financial structure.
A better way to predict the returns youíll receive on an investment is to estimate its intrinsic value and then compare it to the asking price.
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