In general. Risk is all around us, and we all take risks every day. Some people consider driving a car risky. Others don'tseem to mind driving but don't like flying in an airplane--even though statistics show you're far more likely to die ina car than in an airplane. Some of us, like racecar drivers, cliff divers, and bungee jumpers, actually thrive on risk.Others go to great lengths to reduce risk.Risk is multidimensional with many factors interacting.

For example, an athlete in top physical condition maysuffer a fatal heart attack while exercising because he or she has a family history of heart disease.Some risks are more apparent than others. For instance, walking a high wire is quite obviously a risk. On theother hand, the danger of being struck by lightning is not so obvious.The bottom line is that you can't live without taking some risks. Since you cannot totally eliminate them, the bestyou can do is try to reduce them as much as possible. That's why we avoid people with colds, eat healthy diets,wear life jackets when we go boating, and buy life insurance..

Risk in the investment world

Some people view risk as a negative, others as a positive. Ask any group of people what risk means to them, andyou are likely to get some of these answers:• Danger• Possible loss• Uncertainty• Challenge• Opportunity• ThrillIn the investment world, however, risk means uncertainty. It refers to the possibility that you will lose yourinvestment or that an investment will yield less than its anticipated return. More simply stated, risk refers to the probability that an investment will make or lose money. Every investment carries some degree of risk because its returns are unpredictable. The degree of risk associated with a particular investment is known as its volatility.

The relationship between risk and return

When you invest, you plan to make money on that investment or, more accurately, earn a return. Risk and return are directly related. The higher the risk, the higher the return potential. If you want a higher rate of return, you will have to accept a higher risk. Conversely, you may accept a lower risk, but the return potential is lower.Technical Note: The term "risk-return tradeoff" refers to the universal principle that investorsshould plan to be compensated for taking higher levels of risk of loss by earning higher rates ofreturn.Waddell & Reed Page 3 of 9

The relationship between risk and time, or the time horizon

The length of time that you plan to remain in a particular investment vehicle is known as your investment planning time horizon. Generally speaking, the longer your time horizon, the more you can afford to invest more aggressively, in higher-risk investments. This is because the longer you can remain invested, the more time you'll have to ride out fluctuations in the hope of getting a greater reward in the future. Of course, there is no assurance that any investment will not lose money.   

Risk-taking propensity

Each of us is able to accept a certain amount of investment risk. This is known as our risk-taking propensity. Those of us who can accept a relatively great amount of risk are referred to as risk tolerant. On the other end of the spectrum, those who can accept very little risk are known as risk averse. Those who hold the middle ground are risk neutral or risk indifferent. There are ways to measure your risk tolerance, using tests to assess how you react to different types of risk, such as monetary, physical, social, and ethical. These tests aren't foolproof, since we are essentially talking about psychological behaviors that may vary under different conditions. However, the results from these tests are generally considered reliable and valid. Your risk-taking propensity is as important in determining which investments match your risk-return expectations as the risk of the investment itself.  

The accompanying pages have been developed by an independent third party.Forefield's content and information is provided for informational and educationalpurposes only. Neither Forefield Inc. nor Forefield Advisor provides legal, tax,insurance, investment or other advice and should not be relied upon for suchpurposes. Waddell & Reed does not guarantee their accuracy or completeness, andthey should not be relied upon as such. These materials are general in nature anddo not address your specific situation. For your specific financial planning andinvestment needs, please discuss your individual circumstances with your Financial Advisor