In finance, risk represents the likelihood of losing money or the uncertainty regarding returns on an investment or loan. Risk can arise from various factors, such as market volatility, economic downturns, or borrower defaults. Lenders assess risk when deciding whether to approve a loan, often using risk-based pricing to set interest rates higher for riskier borrowers. For investors, balancing potential returns with risk is vital, as higher returns often come with greater risk. Effective risk management involves diversifying investments and carefully analyzing financial conditions and market trends.