Differentiate risk and probability? Give example
Risk and probability are related concepts, but they represent different aspects of an uncertain event.
Risk refers to the potential harm, damage, or negative consequences that may occur as a result of an uncertain event or decision. It takes into account both the likelihood and the impact of an event. Risk is often evaluated by considering the severity and extent of possible losses.
For example, let's consider investing in the stock market. The risk involved would depend on various factors such as the volatility of the market, the financial stability of the company, and the overall economic conditions. If an investor puts all their money into a single stock with a high potential for volatility, there is a higher risk of significant financial loss.
On the other hand, probability refers to the likelihood or chance of a specific outcome occurring. It represents the likelihood that an uncertain event will happen. Probability is often expressed as a percentage or a decimal between 0 and 1.
Continuing with the stock market example, let's say there is a 20% probability of a particular stock price dropping by 20% within the next month. This means that there is a one in five chance that the stock will experience a significant decline in value.
In summary, risk focuses on the potential negative consequences or losses associated with an uncertain event, while probability is all about assessing the likelihood or chance of that event occurring.