Final answer:
Risk is an investor's uncertainty about potential economic gains or losses from an investment. It is considered alongside the expected rate of return to judge the potential for profit and the likelihood of deviation from expected outcomes.
Step-by-step explanation:
Risk is an investor's uncertainty about the economic gains or losses that will result from a particular investment. When considering the expected rate of return, which is the average anticipated return on an investment, an investor must also consider the risk associated with that return. Risk measures the potential fluctuations in returns due to various factors such as default risk and interest rate risk. Investments that are considered high-risk typically have a wide range of potential outcomes, meaning that the actual returns can significantly diverge from the expected rate of return. Conversely, low-risk investments tend to have actual returns that more closely align with the expected rate of return over time.