Investment risk can be defined as the probability of loss or lower-than expected returns from an investment.
It must be understood that a risk-free investment does not exist, but investment funds vary between being low risk and high risk. Even cash held with a financially secure bank is exposed to inflation risk (the risk that rising prices will erode the ‘real’ value or purchasing power of the cash held on deposit) and counterparty risk (the risk that the bank is unable to meet its financial obligations, i.e. return a depositor’s money).
A commonly used measure of risk in the investment world (although it is by no means an exact science) is to look at the past annualised volatility of an investment. Volatility is a measure of how widely an investment’s range of returns have varied from its own (or its benchmarks) average return over a particular period of time; thus a higher volatility means an investment’s value can potentially be spread out over a larger range of values. For example, if an investment had an average annual return of 5% over the past 5 years and its volatility was 15, the range of annual returns over the 5 year period was between +20% and -10%.