What is Risk? To do this, we need to look at our second key term, "risk" This has two distinct colloquial meanings: 1) Dangerous ("If you climb that ladder, you're taking a risk") 2) Chancy ("It's a risky investment") The technical meaning of "risk" in economics and decision theory formalizes this second colloquial meaning, and refers to variation in yield or payoff of some decision or action Notice that taking a risk in this sense can be either beneficial (e.g., the "risky investment" might do really well) or costly (the investment does poorly) Thus, economic risk is a probabilistic concept, measured in statistical units such as variance or standard deviations; and it applies to the consequences of some action, such as the variation in yield ("income") from a given choice or action Risk in this sense can vary independently from average values: thus, investing in a single company's stock or a single agricultural crop will produce an average yield that is lower or higher (or the same) than can be obtained from a diversified portfolio of stocks
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