A calculated risk is a risk that is taken after careful consideration of risk probability, risk impact and rewards. This can be contrasted with risks that are taken unknowingly or without much of an evaluation based on optimism or a lack of due diligence. The following are illustrative examples of a calculated risk.
InvestingGenerally speaking, investing without a firm understanding of the risks can be viewed as speculation. Investors who take calculated risks compare investments in terms of risk/reward ratios as opposed to focusing on the rewards. For example, an individual investor is attracted to a telecom company for its 6% dividend yield. They consider risk in areas such as business risk, financial risk, liquidity risk and inherent risk and conclude the firm is relatively low risk as compared to the rest of the market. As such, the investor takes a calculated risk with a small investment in the stock.
A big wave surfer regularly enters turbulent ocean conditions that would be dangerous to the average person. They reduce risks by tuning their skills, staying in top physical condition, mental preparation, sufficient rest and careful consideration of everything that could go wrong with plans to survive each scenario. They never surf alone and always watch conditions for several minutes before entering the water. The surfer still faces safety risks but these risks are calculated as much has been done to mitigate risk.
BusinessAn entrepreneur starts a business that has a 95% probability of failing. They go into the venture fully accepting this reality and constrain their investment to a level they can afford to lose. The entrepreneur finds ways to start small and doesn't quit their day job until they make significant progress that reduces the risk of failure.
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