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Technology Stocks : Internet Analysis - Discussion
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To: BGR who wrote (126)2/8/1999 12:07:00 AM
From: Chuzzlewit  Read Replies (1) of 419
 
Apratim, you're right! I think you've hit the nail squarely on the head with your last post. Nomenclature is at the heart of it.

If you assume that there are two bets that you can make with equal expected values, but one of them has a probability of 0.5 of not paying off at all and an 0.5 probability of paying off $2, and the other bet has a probability of 1 of paying off $1.00, most people would agree that the first bet is more risky because they would focus on the chance of losing their money. If investors are risk averse, the price of the first "investment" would be less than that of the second.

But once you abstract these simple concepts mathematically it becomes counterintuitive for many people to accept the proposition that the probability of a greater than expected payoff signifies risk. They have an easier time understanding that the greater the chance achieving a payoff less than the expected value equates intuitively to risk. But since the spread of the expected payoffs is normally distributed, focusing on the probability distribution of less than expected return does no violence to the concept of risk. You can express it as half of the standard deviation, or half of the variance if you prefer.

TTFN,
CTC
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