Financial Risk Management Definition

All forms of investment carry a tradeoff between potential return and risk of loss. The ideal investment would offer a high rate of return and entail little or no risk-but such an investment does not exist. Investors must therefore weight their ability to tolerate risk with their desire to make money. Conventional wisdom suggests that young investors should take plenty of risk and take plenty of return, whereas older investors-investors closer to retirement-should limit risk and accept small returns. Financial risk management is the process of determining how much risk an investor can tolerate and then tailoring financial planning efforts to match the investment risk.