Risk is uncertainty. For example, there is a risk it will rain tomorrow.
People who invest don’t like uncertainty unless they will be fairly compensated for it, either now or in the future. All pricing in the stock and bond markets is inherently based on providing appropriate monetary compensation for the level of risk the investor is willing to accept. If you only buy and sell at fair market value, you will be fairly compensated.
A GIC or federal government bond is risk-free. Why? Because you know in advance how much money will be in your pocket after it reaches it maturity date and turns into cash. If the institution selling you the GIC goes bankrupt, you still get all principal and interest paid to you because the federal government as agreed to do that if the institution cannot.
When an investment is risk-free the issuer has no need to compensate you for risk, because there is none. The expected return on investment is only the “risk-free” rate, closely tied to the central bank’s “policy” rate. The “risk-free” return compensates you for agreeing to give up your money for a certain period of time. However the compensation is low because there is no need to compensate for risk.
Unlike GICs, stock prices go up and down, often for unpredictable reasons. The uncertainty regarding a particular stocks price on any future date is a clear indication of risk.
In mathematical terms, standard deviation is a formal measure of risk. The more the stock price moves around the higher the standard deviation. If a sequence of prices for a stock has the same standard deviation as that of the market as a whole, then that stock is considered to have a “Beta” of 1. If a stock has a Beta of 0.5, then its standard deviation is half that of the overall market. You could say it is half as risky as the overall market.
Some people don’t want the low “risk-free” return available from GICs, but find the market as a whole is too risky for their taste. They could make their investment portfolio half as risky as the overall market by (a) putting 50% into an ETF that represents the overall market, and (b) putting the 50% into something that is risk-free such as a GIC. They will have achieved a comfortable risk level, while getting an overall return on investment that is higher than the “risk-free” rate but still less than the average market return. For example, if the market return is expected to be 8% and the risk free rate is 2.5%, then the half-risk portfolio will an expected return of 5.25%, but with a standard deviation (price volatility) that is half that of the market.
It is important to compartmentalize risk. There are some who consider GICs to be “risky” because they don’t necessarily provide enough money in future to buy some specific product or service if inflation happens to be higher than expected. They are unnecessarily turning two simpler problems into one bigger one that is much harder to manage. If you are a landlubber on a fishing boat the best way not to get seasick is to keep your eyes fixed on the horizon; if you fixate on anything else you will be barfing over the side. When it comes to money, investment-side risk (related to return on investment) and spending-side risk (related to inflation) should be viewed separately and managed separately.
Government-guaranteed GICs are risk-free — because there is absolutely no uncertainty about the number of dollars that will be put into your pocket on that future date when the GIC matures: Personal investing simplified.