What Is Financial Risk

The first lesson focuses on financial risk and has three objectives: understanding the concept of risk versus reward, determining the baseline value for risk and reward, and identifying what causes financial risk in a business. To illustrate the concept of risk versus reward, the lesson uses the example of a tightrope walker, where a higher level of risk results in a higher potential reward, but also more stress and pressure. The 10-year Federal note is used as the benchmark for assessing the amount of risk involved in a particular investment. It is considered a low-risk investment because the federal government can print more money to meet its obligations.
Debt is identified as one of the main causes of financial risk in an investment. Companies incur debt to speed up time and purchase the resources they need to grow their business. However, excessive debt can result in risk for the investor, as demonstrated through a video game analogy. The more the speed of the game increases, the more targets there are, and the more difficult it is to shoot them, illustrating how debt can increase the risk for a company and its investors.