Risk & Reward in Business

by Osmond Vitez; Updated September 26, 2017

Risk and reward are related factors in the business world. Any company that chooses to enter the marketplace faces risks, whether financial or operational. Reward is the benefit achieved when companies mitigate their risk and earn income from their operations.

Systemic Risk

Systemic risk is the collapse of an entire market or industry in the marketplace when one company fails. Businesses face this risk when selling products in a saturated marketplace with large competitors.

Systematic Risk

Systematic risk is faced by businesses that do not diversify their products or services. Companies can avoid this risk by offering several products in the marketplace and creating multiple revenue streams.

Measuring Risk

Businesses measure risk by comparing their expected rate of return to the normal risk-free rate of return in the marketplace. Formulas like the Capital Asset Pricing Model (CAPM) help businesses determine the amount of reasonable risk by comparing rates of return to the amount of risk in investments.

Mitigating Risk

The first step in earning rewards in business is to mitigate the risk involved in business decisions. Risk can be mitigated by diversifying investment strategies. Choosing some safe investments or products along with some high risk/reward investments or products will maintain a diversified business strategy.

Achieving Rewards

Businesses achieve rewards when they choose investments that have the highest rewards and the lowest amount of risk. Some investments will have higher risks than others, so businesses will require higher returns on these investments. All business decisions carry risk, so carefully measuring the risk versus the reward is essential when reviewing business opportunities.