What is Capital Risk?
Capital risk reflects the ability to lose part or all of an investment. It refers to the entire asset gamut that is not subject to a complete return guarantee for original capital.
When investing in stocks, non-governmental bonds, real estate, commodities, and other alternative assets, investors face capital risk. When a company funds a project, it exposes itself to the possibility that the project won't produce enough returns to offset its invested money.
Analysing Capital Risk
Capital risk is a top of mind for a company's project managers as well. Capital budgeters analyse proposed investments in a project, for example, a new product line or factory, by modelling projected cash flows against the project's capital requirements.
The risk analysis process will attempt to quantify capital risk by varying the assumptions regarding the model. No rational firm will undertake a capital project if the model shows an unacceptable level of risk to the invested capital.
