Most people would be willing to accept our definition of return without much difficulty. Not everyone, however, would agree on how to define risk, let alone how to measure it.

To begin to get a handle on risk, let's first consider a couple of examples. Assume that you buy a US Treasury note (T-note), with exactly one year remaining until final maturity, to yield 8 percent. If you hold it for the full year, you will realize a government-guaranteed 8 percent return on your investment - not more, not less. Now, buy a share of common stock in any company and hold it for one year. The cash dividend that you anticipate receiving may or may not materialize as expected. And, what is more, the year-end price of the stock might be much lower than expected - maybe even less than you started with. Thus your actual return on this investment may differ substantially from your expected return. If we define risk as the variability of returns from those that are expected, the T-note would be a risk-free security whereas the common stock would be a risky security. The greater the variability, the riskier the security is said to be.