What are the risks?

When we talk about risk, we are considering the likelihood of an outcome being different to that which is expected (or desired).

When we consider the future, most of us are natural optimists - otherwise why would we invest at all? - so investors need to be aware that the higher the return promised for an investment above normal market returns, the more risk there is of that return not being delivered.

As well as the risk of the promised return not being delivered at all, investors need to consider the risk of a return not being delivered when promised. If we are saving for a particular event, the impact of the promised return being delivered late can be nearly as significant as it not being delivered at all.

The risk profile of an investment is the likelihood of the return from that investment being different (whether better or worse) from that which is expected, over a given period.

The risk profile is made up of two factors; the risk associated with assets of that class or sub-class, usually called the β (beta) factor, and the risk of that particular asset itself, usually called α (alpha).

When investment experts speak of the search for alpha, they're referring to the search for assets that are likely to outperform their peers.