Risk of ruin,
Definition of Risk of ruin:
Risk of ruin is the probability of an individual losing substantial amounts of money through investing, trading or gambling, to the point where it is no longer possible to recover the losses or continue. Risk of ruin is typically calculated as a loss probability, also known as the "probability of ruin.".
A catastrophic risk where the possibility of the kind of loss made is so great that the business cannot be sustained. In this case, the loss exceeds the profit and even overrides the capital of the business, which most likely leads to bankruptcy. Hence, the greater the capital involved in the investment the higher the percentage risk of ruin.
Risk of ruin can be identified through advanced financial modeling and expressed as a probability. The complexity of the financial modeling methodology involved in calculating risk of ruin will typically depend on the number and variety of investments involved in a comprehensive trading portfolio. In basic terms, the risk of ruin in gambling and investing is not so different as it depends on how many bets (investments) are placed and how much capital there is to cushion probable losses. The main difference being that investments are not zero-sum bets. Each investment has different risk profiles and payout probabilities, with some risking all capital and some guaranteeing a return of principle regardless of performance.
Meaning of Risk of ruin & Risk of ruin Definition