Financial risk

Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financial loss and uncertainty about its extent. A science has evolved around managing market and financial risk under the general title of modern portfolio theory initiated by Harry Markowitz in 1952 with his article, "Portfolio Selection". In modern portfolio theory, the variance (or standard deviation) of a portfolio is used as the definition of risk.

Financial risk is a persistent global problem that affects individuals, businesses, and economies worldwide. According to the International Monetary Fund (IMF), the global financial system remains vulnerable, with potential risks on the rise. In 2020, the global debt reached an all-time high of $277 trillion, equivalent to 365% of the world's GDP, highlighting the magnitude of the financial risk. Additionally, the World Economic Forum's Global Risks Report highlighted that 53% of surveyed experts believed that economic confrontations and financial crises were the most likely threats to global stability. These statistics underscore the urgent need for proactive measures to mitigate financial risk and safeguard the global economy from potential shocks.

The problem of financial risk is a ticking time bomb that threatens to implode the very foundations of our global economy. With the ever-increasing complexity and interconnectedness of financial markets, the potential for catastrophic meltdowns looms ominously over our heads. From the collapse of banking giants to the bursting of asset bubbles, the repercussions of financial risk can reverberate throughout the world, causing widespread unemployment, poverty, and even societal unrest. It is imperative that we address this grave issue with utmost urgency, implementing robust regulations and safeguards to protect against the devastating consequences of financial risk.

Financial risk is often portrayed as a significant problem, but it can also be argued that it is a necessary and inherent part of any economic system. Without financial risk, there would be limited incentive for innovation, investment, and growth. It is through taking calculated risks that businesses and individuals have the opportunity to achieve substantial financial gains. While it is crucial to manage and mitigate risks, dismissing financial risk as a serious issue undermines the potential rewards and positive outcomes that can arise from embracing it.