Business risk
Business risk generally
In its broadest sense, business risk means the set of risks taken by a business in choosing to operate in a commercially 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.
In extreme cases this risk may even result in the failure of the wider business.
Many firms attempt to limit the scale of this risk by restricting the range of their business activities to their core competences.
Business risk in the Capital Asset Pricing Model
In the capital asset pricing model (CAPM) 'business risk' means the component of total risk which arises from the business operations of a company which has issued shares or other securities.
Business risk in the CAPM is measured by the ungeared beta of the business.
Risk in this CAPM context is defined narrowly to mean the variability of the company's share returns compared with the returns of the market as a whole, as if the company had no debt.
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.
