Risk refers to the variability of the potential return associated with a given investment. In addition to returns, risk is a major consideration when making capital budget decisions. The firm must compare the risks associated with the expected return from the given investment. Higher returns are needed to increase the level of risk. In other words, the higher the risk, the higher the return - and conversely, the lower the risk, the higher the moderate return.

Also known as its risk and return trade off risk-return spectrum. There are different categories of potential investments, each with their own position in the overall risk-return spectrum. General advances are: short-term debt, long-term debt, assets, high-yield debt and equity. Many costs need to be borne for the existence of risk.