Speculation in The Intelligent Investor

Risk is exchanged in finance, because not every investor has the same risk tolerance. Risk in finance is most simply defined as volatility in future returns - it does not mean the same thing as 'loss'.

If you put $100 in the bank and it pays 2% interest, you will end the year with $102. Depending on your country, your government probably guarantees that your bank account is secure, so in finance that is called the 'risk-free rate'. That is: short of government collapse, there is no volatility in your returns; you know exactly what you will get.

Now suppose I offer you a $100 bet on a flip of a coin, and you win $204 if it is tails or get nothing if it's heads, then that is very risky - because your two different results are very different. You either double your money + an extra $4, or lose everything. This variance between 2 outcomes is what we call 'risk' in finance.

But now consider: If we do the coin flip bet 1,000 times, on average you come out ahead - because half the time you win $204, and half the time you win nothing - so you get 50% * 204 = $102 on average every time we play. **This is the same 'expected return' AKA 'average return' as if you had put your money in the bank earning 2% interest.

In the real world, the average person doesn't want risk - given 2 equal outcomes, the less volatile option is the preferred one. So if you have a risky proposal, you need to make it worth an investor's while.

This is why the average returns on the stock market exceed the risk-free interest rate (over time, average returns in the stock market can be seen as ~7%, depending on country and time period). That's because some years there is a market crash, and some years there is a market boom - even though the average return is higher, whether you want to invest in the stock market depends on your risk profile.

Not every investor has the same risk tolerance. Someone who is retired needs certainty over their future income, and someone young with lots of opportunities and time to recover is probably more willing to take on risk. So if I am 70 years old and own a coffee shop that gives me a 10% return every year, I might sell it to a younger person and earn 2% in the bank. I have exchanged my high-risk asset with low-risk cash. We both win, because we have different motivations - the young person earns more on average, and I have reduced my risk profile.

So when the author says 'risk is exchanged', they basically mean that risk is something you need to pay someone to accept. This is no different from paying insurance premiums so that the insurance company makes a profit and takes the risk of accident off of your hands.