Question

Explain the statement, "risk by itself is never bad or good." What does this mean? Why is it true?

Answer 1

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Risk is uncertainty. Risk is neither good nor bad. It all depends upon the risk attitude of the Individual.

Some times "same risk" can be a
Good Risk for a certain Individual and
A bad risk for another Individual.

A person should asses himself as per his Risk attitude and only purse such things which are in line with his Risk Tolerance.

Risk tolerance is the ability of the individual to take the risk. Higher the risk tolerance higher the ability to take a risk.

Risk Attitude.

Risk attitude is the behaviour of individuals under uncertainty.

There are three types of attitudes:
1. Risk seeking.
2. Risk neutral.
3. Risk Aversion.

1. Risk seeking:
The attitude of the individual is to gamble. the individual is said to be risk loving. The gamble has an uncertain outcome and individual wishes to take extra return due to high uncertainty.

2. Risk Neutral.

If the individual is indifferent between gamble or guaranteed outcome then he said to win a risk-neutral individual.

Here the Individual main focus is on the return. He will be willing to take more risk for more return.

3. Risk-Averse.
The individual chooses to have a guaranteed outcome. He does not want to take a chance of gambling at all.

Individuals are likely to shy away from risky investments for a lower but guaranteed return.

So it depends upon individual risk tolerance and attitude which makes risk a good risk or bad risk.