Q:

What is the difference between risk and uncertainty?

A:

Risk is defined as unknowns that have measurable probabilities, while uncertainty involves unknowns with no measurable probability of outcome. These concepts are related, but not the same.

Uncertainty and risk are closely related concepts in economics and the stock market. The definitions of risk and uncertainty were established by Frank H. Knight in his 1921 book, "Risk, Uncertainty, and Profit," where he defines risk as a measurable probability involving future events, and he argues that risk will not generate profit. Risk is calculated using theoretical models, or by calculating the observed frequency of events to deduce probabilities.

Uncertainty is not quantifiable because future events are too unpredictable, and information is insufficient. The uncertainty of the event is not something that can be calculated using past models. Though randomness of events underlies both principles, it is important to distinguish the differences as they relate to investments. An investor has the opportunity to calculate the risks by deducing past probabilities to protect his or her investment portfolio. Uncertainty is not quantifiable and therefore does not offer the same opportunity to protect an investment. Both principles work in tandem and do apply when in investing situations, or even prospects of investing on the stock market.


Is this answer helpful?

Similar Questions

  • Q:

    What is a 3-for-2 stock split?

    A:

    A three-for-two stock split is defined as a corporate more to increase the number of stock shares on the market by giving shareholders three shares of stock in exchange for every two shares held, according to Investopedia. The split shares retain the same total stock value as before.

    Full Answer >
    Filed Under:
  • Q:

    What is a "consent of surety"?

    A:

    A "consent of surety" is defined by federal law as the consent a contracting party must receive from the surety on changes made to an initial contract, according to the Legal Information Institute at Cornell University Law School. In certain cases, obtaining a consent of surety is required by law.

    Full Answer >
    Filed Under:
  • Q:

    What is the difference between assets and liabilities?

    A:

    An asset is something a business owns that helps produce economic value going forward, according to Chron Small Business, and a liability is an obligation to pay money to a business or entity going forward. Companies sometimes opt to sell assets to pay off liabilities.

    Full Answer >
    Filed Under:
  • Q:

    What is the difference between a bond and a debenture?

    A:

    A bond is a debt security that an entity secures from an investor at a fixed interest rate, while a debenture is a debt security that is obtained by a creditworthy reputation rather than through a specific asset. Thus, the main difference between a debenture and a bond is that a debenture has no collateral.

    Full Answer >
    Filed Under:

Explore