Final answer:
Risk assessment involves identifying potential risks, analyzing their likelihood and impact, and prioritizing based on severity. Investors should consider their own risk tolerance, investment time horizon, and account costs. Risk levels typically decrease as one approaches retirement.
Step-by-step explanation:
Risk is calculated by evaluating the likelihood and potential impact of an adverse event. There are three main steps in risk assessment: identification of potential risks, analysis of the likelihood and impact of these risks, and prioritization of the risks based on their severity. This process is crucial for investors in the financial market, as they consider different types of financial assets, such as stocks, bonds, and treasury securities, each with varying levels of risk and potential return.
To assess risk before making an investment, investors must consider their own risk tolerance, the time horizon for their investment, the expected return, and the liquidity of the investment. Investors should be aware of various account types, like savings accounts, checking accounts, and retirement accounts like IRAs, along with their respective costs. For example, some accounts might have higher fees but offer greater flexibility or higher returns.
Over a lifetime, investment risk levels are expected to change, typically being higher during the early part of one's career when there is more time to recover from potential losses. As one approaches retirement, the risk level generally decreases to preserve capital.