Risk through the Looking Glass

This article argues that the general acceptance of volatility constituting a good measure of risk is not appropriate in the context of capital investment appraisal. It is argued that expected loss should be employed as a measure of risk. It is further illustrated how the risk aversion attitudes of potential investors can be taken into consideration in the capital investment decision. The pursuit of return without risk inevitably leads to the transfer of wealth through an underperforming banking system which collaborates with an unregulated financial market seeking low risk and relatively safe returns for the benefit of their wealthy clients. The promise of a ‘return without the risk’ leads financial intermediaries in an elusive direction: the only way to attain this is through directing funding to capture existing assets rather than investing in the real economy to create new wealth.