By senorcoconut on Skatehive
Most people think investment risk means how much the price of something moves. If it’s volatile, it’s risky. If it’s stable, it’s safe. But there’s another way to understand risk—one that professional investors often use but rarely explain clearly. It’s called the Risk Waterfall. Once you understand this concept, you start to see that risk doesn’t disappear in financial markets. It simply flows downhill until it reaches someone who must ultimately absorb it. And surprisingly, that “someone” is often everyday investors. Let’s break it down in a way that anyone can understand. https://img.leopedia.io/DQmNvbg1xEy5EMTvxxpefgUYKidfZjUaE3vSs82w4aYdSKS/file000000002c0471fd99e2f50adcc2ee68.png What Is the Risk Waterfall? Imagine a literal waterfall in nature. Water always flows from the top to the bottom. It cannot flow upward. Risk in financial markets behaves in a similar way. Large institutions—banks, corporations, and financial engineers—often create or package financial risk, then pass it