The word "risk" means different things to different investors. Wall Street tends to think of it in the context of volatility, where greater volatility equals greater risk -- even if the stocks trend higher as a result. We look at it differently, however. Fool co-founder David Gardner defines risk as "the chance that your investment outcome will be a substantial loss of capital."

Understanding this type of risk is a very important skill for investors, especially for those seeking the kinds of high-growth, high-return stocks David features in his Motley Fool Rule Breakers service. With that in mind, David and his team recently unveiled a new tool that you can use to assess the riskiness of any of your stocks. It's meant to be used to look at any stock, not just potential high growers.

The process is simple: Run your company through the 25 questions below, tally up the number of "no" answers, and see where it falls on the scale. I'll use Activision Blizzard (Nasdaq: ATVI) as an example. This longtime Stock Advisor holding rules the video game world with hits such as Guitar Hero, Call of Duty, and World of Warcraft.

THE COMPANY (0 of 5 = "no")
1. Profitable: Is the company profitable over both the past quarter and past 12 months?
Yes.

2. Cash Flow: Is the company cash flow-positive over both the past quarter and past 12 months?
Yes. It's generated more than $1 billion over the past four quarters.

3. Brand: Does the company's business rely on recognizable branding, truly valued by its buyer base?
Yes. The games themselves are strong brands, with new releases eagerly awaited by fans.

4. Diversified: Has the company diversified its buyer base, so that no single customer accounts for more than 20% of revenue?
Yes. GameStop and Wal-Mart Stores are the two biggest customers, each accounting for 10% of revenue last year.

5. Raving Fans: Does the company receive, on the whole, positive word of mouth from its customers?
Yes. Gamers tend to be very loyal to its titles, especially Blizzard's. Starcraft, for instance, is still a hit more than 10 years after it was first released, and that word of mouth will drive sales when Starcraft II is released later this year.

FINANCIALS (1 of 5 = "no")
6. Growth: Did the company grow its sales between 10%-40% annually over the previous three years?
Yes. Sales grew by 20.4% annually, taking into account the revenue from Activision and Blizzard when they were still separate in 2007.

7. Independence: Can the company operate its business over the next three years without relying on external funding?
Yes. With more than $3 billion in cash and no debt, I'd have to say so.

8. Disclosure: Does the company report to a high standard of disclosure, consistent with SEC guidelines in the U.S.?
Yes.

9. Transparency: Would an intermediate-level investor find the company's financial statements and management ownership disclosures relatively easy to sift through and understand?
Yes. The discussion is clear, and the footnotes are not too dense.

10. Well-Managed: Over the most recent fiscal year, did the company report a return on equity of 15% or higher?
No. Officially, they did 1% in 2009. Even backing out $432 million in merger-related charges and writedowns won't get that figure above 15%. Competitor Electronic Arts (Nasdaq: ERTS) lost money in its just-completed fiscal year (and for the two years before that), so its ROE is negative at (23%), while Take-Two Interactive (Nasdaq: TTWO) faces a similar situation. These two competitors are more subject to the console upgrade cycle than Activision is. Activision benefits from a smooth revenue stream from the online game World of Warcraft.

THE COMPETITION (3 of 3 = "no")
11. Underdog: Is the company free of any direct competitors possessing substantially (twice as much or more) greater financial resources?
No. One gaming company, Nintendo (OTC BB: NTDOY.PK), is almost three times as large. On the other hand, it develops games primarily for its own hardware systems.

12. Goliath: Is the company free of any disruptive upstarts visibly challenging its business model?
No. Electronic Arts and Take-Two are just two of the many game publishers out there, any one of which could come up with a successful game.

13. Moat: Would potential new competitors face high economic, technological, or regulatory barriers to entry?
No. Get some smart people together, design a game, write code, sell it.

THE STOCK (0 of 3 = "no")
14. Market Cap: Does the stock have a market cap greater than $500 million?
Yes. $13.3 billion, to be exact.

15. Beta: Is this stock's beta rating over the past 12 months less than 1.3?
Yes.

16. P/E Ratio: Does the stock have a positive price-to-earnings multiple below 30?
Yes. Even though it's trading at 44 times trailing earnings, that's skewed by a large asset write-off effect from the merger between Blizzard and Activision. Using forward earnings estimates, its multiple is just 13 times right now.

PEOPLE (1 of 2 = "no")
17. Founder: Do any of the founders or founding family still have at least a 5% stake in the company?
No. Insiders own less than 1%.

18. Experience: Do the top three officers have more than 15 years of combined leadership at the company?
Yes. CEO Robert Kotick has run Activision for the last 19 years.

SERVICE-SPECIFIC (0 of 2 = "no") ... here, Stock Advisor
19. Stock Advisor: Does this company meet a majority David's or Tom's investing rules?
Yes. This is a pick from David. It's expected to benefit from the long term trend of gaming becoming a bigger part of people's entertainment lives. Also, as a consumer-facing business, its products are enduringly popular, even beloved. Look at South Korea, where playing Starcraft is a national sport.

20. Binary Destiny: Are the company's future business prospects easily able to withstand the shock of binary outcomes that go against it?
Yes. I answer this way because there really aren't any binary outcomes, such as drug approval, that can affect it.

FOOLISHNESS (3 of 5 = "no")
21. Immaculate: Is this company certain to be fault-free and fraud-free in all its corporate statements and deeds?
No. This will be a "no" for almost any company.

22. You: Do I want to know more about this company; am I willing to dig deeper, learn more, and ask questions on the boards to actively try to understand this company?
Yes.

23. Custom question No. 1: Ask and answer the most insightful question you can come up with when assessing this specific company's risk.

Can Activision replace revenue streams from games that are popular and then die off, as Guitar Hero seems to be doing?
Yes. It has more than two dozen studios developing games. Call of Duty and Guitar Hero are not the company's only hopes.

24. Custom question No. 2:

Can Activision consistently produce massive hits?
No. While the company can develop more games and expansions or sequels to current games, consumers ultimately determine which ones will succeed. The company doesn't provide a "must-have" that consumers cannot do without.

25. Bulletproof: Can you be certain that this company is so invulnerable to external world or macroeconomic events that you're guaranteed to get all your capital back?
No.

I count eight "no" responses, giving this stock moderately low risk on the Risk Ratings Scale:

Risk Ratings Scale
High (20-25 points)
Moderately High (15-19 points)
Moderate (10-14 points)
Moderately Low (5-9 points)
Low (0-4 points)

With a checklist like this, you'll think about your company from several different angles. Do it for each of your companies. I promise you'll come away with a greater understanding of the businesses and their future prospects.

Wal-Mart Stores is a Inside Value choice. Take-Two Interactive is a Rule Breakers selection. Activision Blizzard, Electronic Arts, and Nintendo are Stock Advisor recommendations. Motley Fool Options has recommended a synthetic long position on Activision Blizzard and covered calls on GameStop. The Fool owns shares of Activision Blizzard.

Fool editor Jim Mueller owns shares of Activision, as well as a synthetic long on the company. The Fool's disclosure policy will take on all comers in the game of their choice.