From the course: Corporate Finance Foundations
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What is risk and why don't we like it?
From the course: Corporate Finance Foundations
What is risk and why don't we like it?
- Let's talk about risk, first, what is risk? Risk is uncertainty about what will happen in the future. - Now, in the future, there will be a variability as to possible outcomes. We make an investment in a product, we hire a key person, or we build a building. It could go well, it could go poorly. - Variability and potential outcomes is what we call risk. - Now, consider a commercial real estate investment. I can build a commercial real estate building and rent it out to tenants. The building can be in the heart of the business district where there are many potential tenants. I'm pretty confident that I'd be able to rent space in that building. - On the other hand, let's suppose I'm considering building a commercial building in an industrial park at the edge of town, and when I say edge of town, I mean it's out there, nobody is there yet. There are weeds on the lot, tenants may come in or not, I'm not sure, there is much more risk, much more variability and potential outcomes out…
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