The word risk originated from the Latin riscare which means “to run towards danger”, that is, to risk or dare. The concept can be explored from different perspectives, but in this article the focus is on financial risk as a key factor in investor behavior.
Risk is the degree of uncertainty regarding the profitability of an investment. Therefore, there is a causal relationship between profitability and risk, and it is up to the investor to define the level of risk that he is willing to assume in exchange for a more or less favorable potential profit. Potential is synonymous with uncertainty about the return.
The investor profile can be divided into three categories: i) lover; ii) moderate;; iii) averse. None of the profiles is permanent, because the investor changes his behavior according to the level of “comfort” they recognize in the market.
The risk-loving investor has an appetite for high-risk investments (association with the potential for profit-causality); therefore, this type of investor prefers to risk even with the possibility of a significant loss versus a gain greater than the moment. Their distribution of assets assumes a greater weight of shares (or similar instruments) compared to bonds, as they are not afraid of market fluctuations. His goal is profitability. The moderate investor, on the other hand, seeks to balance their investments through a few bold investments; ie., it takes some risks, but without giving up its safety (at least theoretical). His asset distribution is usually balanced between stocks and/or similar versus bonds.
In the case of the conservative investor, he is totally risk averse. This assumption is based on the need for security (see Maslow’s pyramid). Therefore, it is customary for a “junior” investor to assume this behavior and never give up what is safe. This investor is less willing to take risks, even though it means his profitability will be lower. For this investor, it is preferable to obtain a reduced return rather than risk a loss. His normative strategy is to monetize through continuous low return applications (ex, bonds). In short, it invests in zero risk financial instruments (or at least theoretical).The inexistence of risk per si is a fallacy, as any investment and/or financial instrument translates some level or risk. The difference lies in the amount of risk the investor accepts to incur.