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risk that refers to the uncertainty of income cash flows and asset prices caused by the nature of a firm's operations. For instance, in retail food industry sales and earnings are typically more stable over time than in the auto industry where sales and earnings fluctuate dramatically. Hence, the more certain the firm's income flows, the more certain the investment returns because the undertaken risk is lower. Business risk is managed with a focus on achieving a high return on investment on a long-term horizon.

Financial risk is the risk associated with the uncertainty introduced by the method by which the firm finances its assets. For instance, if a firm finances its assets only with common stocks, then the risk incurred is simply business risk. If instead, it borrows money to finance its assets, it pays interest to its creditors prior to providing income to its stockholders, which increases the stockholder's uncertainty of returns.

Liquidity risk is the risk incurred when an investor is not able to sell an asset for a fair market value. When investors acquire assets, they expect that they will mature or that they will be able to sell it to someone else at a higher price. In either case, investors expect to be able to convert the value of the asset into cash and to use the proceeds for current or future consumption. In this aspect, the more difficult the conversion is, the greater the liquidity risk. For instance, US T-bills have no liquidity risk because they can be bought and sold instantly at their quoted price. On the contrary, real estate pieces, antiques or foreign securities incur high liquidity risk.

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