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To: BGR who wrote (126)	2/8/1999 12:07:00 AM
From: Chuzzlewit	Read Replies (1) \| Respond to 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

To: BGR who wrote (126)	2/8/1999 9:15:00 AM
From: Reginald Middleton	Read Replies (1) \| Respond to of 419

I understand your point on nomenclature, but to the investor - losing money is losing money. However, if you look at the other side of risk - something that investors require compensation for - the concept of upside risk, while unintuitive, will probably make more sense (at least it does to me). Imagine two securities both of which are predicted go up 100% a year, and none of which have any downside risk (i.e. they never go down, and this is guaranteed) but one is predicted to go up at a continually compounded daily rate and the other at 4 steps of equally distributed rates. Most investors will probably prefer the first over the second. You are confusing risk and return. For one, there is really no such thing as upside risk (unless you are short the asset, then in that case the asset price dropping is your upside). Upside is reward, downside is risk. The most novice investor understands this concept, but many advanced, technical investors lose site of this. If you have two principal guaranteed assets with exactly 100% total return, one which compounds daily and one which pays periodically in only 4 steps, the first asset is the most valuable due to the time value of money (a bird in the hand is worth two in the bush). This is a facet of reward, not risk. If the 100% return is guaranteed, the solution to the problem is just that simple (even if you are dealing with equities in lieu of fixed income - i.e. you can use the increase in equity to leverage yourself even further, borrow against, etc. in the first asset while you would have to wait for the second asset.) If the 100% projection is not guaranteed, then the true defintion of risk has now been injected, and that is the possibility of loss in capital and/or income. This is risk from the investor's perspective.