Business risk
Business risk in the Capital Asset Pricing Model
In the capital asset pricing model (CAPM) this term is used to mean the ungeared beta of the business. Because it is ungeared it represents the overall risk (beta) of the business with its element of financial risk removed.
Risk in this CAPM context is defined narrowly to mean the correlation between movements in the company's share returns and the returns to the overall market.
Business risk more generally
The term is also used more broadly to refer to the set of risks which may be taken by a business in seeking to operate in a normal competitive environment; launching a new product or investing in new equipment.
These decisions are risky and they may or may not result in the expected reward, they may even result in extreme cases in the demise of the business. Many firms attempt to limit the scale of this risk by restricting the range of their business to their core competences.
Business risk for financial regulatory purposes
Any potential impairment of the regulated entity's financial position:
- Resulting from a decline in revenues
- Or an increase in expenses
- Leading to a loss
- That must be charged against capital.
