Risk, the possibility of loss, has everyone's head spinning today. Let's review some of the basic forms of risk and those you may encounter as time goes on.

Risk, the possibility of loss, has everyone's head spinning today. Let's review some of the basic forms of risk and those you may encounter as time goes on.

Business risk is the risk that any particular business may be out of favor or mismanaged to the point of poor performance or even bankruptcy. Today, most of the financial sector is going through an unprecedented period of business risk.

To avoid business risk, one must be able to understand the general business climate and the details of any specific company within that industry group.

Market risk is where the price of something can shift even if there has been no significant change in a particular company or asset. Take, for example, banks.

While some of the big ones are truly in tough shape - there are plenty of local smaller banks that totally avoided the perils of over-lending or credit default swaps, yet many of their stocks have also been punished due to market risk.

Credit risk is the risk of not getting paid back. Whether you bought an investment that is supposed to pay you interest or it is the bank wondering if they will collect on their loans, credit risk is a real concern in this economy.

Interest rate risk is the risk that rates will fluctuate dramatically. This risk cuts both ways. It can hurt you as rates go down if you are holding interest-bearing deposits or making loans to people at rates that adjust with the prime rate. And if rates go up, your fixed income portfolio will not be as attractive as it was when the rates were lower. Rising rates could also hurt people with adjustable rate mortgages.

Liquidity risk is the risk that you simply can not turn an asset into cash. Real estate and large capital goods like automobiles are today suffering from liquidity risk. I'm told that there is a buyer for everything if the price is low enough, but I don't think that those people have tried to sell a house in the last year.

Purchasing power risk is basically inflation risk. This is the risk that your assets will not have the same purchasing power at some future point as they do now or as you expect.

This recession's wake-up call has us all rethinking our personal tolerance for risk. Some risk can be avoided, and some risk can be managed. Despite what you think about diversification not working anymore, I still think it is the best way to deal with all forms of risk.

John P. Napolitano is the CEO of U.S. Wealth Management in Braintree, Mass. He may be reached at jnap@uswealthcompanies.com. For online discussion and more information, go to www.makingcentsblog.com.