Financial Theory and Investment Decisions

There are many definitions of risk, but the definition I’ve found that most closely aligns with investing and risk management is that risk is the potential for deviation from an expected result, whether the deviation is a positive or negative result. Managing investment risks, by extension, is the analytical process that measures the potential for deviation to better enable decision-making on what risk to pursue, mitigate or avoid. Risk and return go together, and every investment decision carries an element of risk, which is why a practical understanding of financial theory can assist investment decision-making.