Business risk

What it means

The uncertainty in operating income arising from the nature of the business itself, before any financing decision.

The exam angle

Financial risk is what leverage adds on top. Keeping the two separate is the point of the distinction.

Where it appears in the syllabus

• Corporate FinanceCFA Level I · exam weight 6–9% · Governance, working capital, capital allocation, capital structure.
• Foundations of Risk ManagementFRM Part I · exam weight 20% · Risk taxonomy, governance, CAPM, multifactor models, financial disasters.

Related terms

• Agency problemThe conflict that arises when managers act in their own interest rather than that of the owners who employ them.
• Capital budgetingThe process of deciding which long-term investments a company should make.
• Capital structureThe mix of debt and equity a company uses to fund itself.
• Cash conversion cycleThe time between paying for inventory and collecting cash from the customer.
• Corporate governanceThe system of controls by which a company is directed and held accountable to its stakeholders.
• Cost of equityThe return equity holders require for bearing the residual risk of the business.