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Reading 9 Probability Concepts (Intro)
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All investment decisions are made in an environment of risk. The tools that allow us to make decisions with consistency and logic in this setting come under the heading of probability. This reading presents the essential probability tools needed to frame and address many real-world problems involving risk. We illustrate how these tools apply to such issues as predicting investment manager performance, forecasting financial variables, and pricing bonds so that they fairly compensate bondholders for default risk.
We explore in detail the concepts that are most important to investment research and practice. One such concept is independence, as it relates to the predictability of returns and financial variables. Another is expectation, as analysts continually look to the future in their analyses and decisions. Analysts and investors must also cope with variability. We present variance, or dispersion around expectation, as a risk concept important in investments. The reader will acquire specific skills in using portfolio expected return and variance.
We explore in detail the concepts that are most important to investment research and practice. One such concept is independence, as it relates to the predictability of returns and financial variables. Another is expectation, as analysts continually look to the future in their analyses and decisions. Analysts and investors must also cope with variability. We present variance, or dispersion around expectation, as a risk concept important in investments. The reader will acquire specific skills in using portfolio expected return and variance.
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Reading 9 Probability Concepts Introduction
All investment decisions are made in an environment of risk. The tools that allow us to make decisions with consistency and logic in this setting come under the heading of probability. This reading presents the essential probability tools needed to frame and address many real-world problems involving risk. We illustrate how these tools apply to such issues as predicting investment manager performance, forecasting financial variables, and pricing bonds so that they fairly compensate bondholders for default risk. Our focus is practical. We explore in detail the concepts that are most important to investment research and practice. One such concept is independence, as it relates to the predictability of returns and financial variables. Another is expectation, as analysts continually look to the future in their analyses and decisions. Analysts and investors must also cope with variability. We present variance, or dispersion around expectation, as a risk concept important in investments. The reader will acquire specific skills in using portfolio expected return and variance. The basic tools of probability, including expected value and variance, are set out in Section 2 of this reading. Section 3 introduces covariance and correlation (measures o
Reading 9 Probability Concepts Introduction
All investment decisions are made in an environment of risk. The tools that allow us to make decisions with consistency and logic in this setting come under the heading of probability. This reading presents the essential probability tools needed to frame and address many real-world problems involving risk. We illustrate how these tools apply to such issues as predicting investment manager performance, forecasting financial variables, and pricing bonds so that they fairly compensate bondholders for default risk. Our focus is practical. We explore in detail the concepts that are most important to investment research and practice. One such concept is independence, as it relates to the predictability of returns and financial variables. Another is expectation, as analysts continually look to the future in their analyses and decisions. Analysts and investors must also cope with variability. We present variance, or dispersion around expectation, as a risk concept important in investments. The reader will acquire specific skills in using portfolio expected return and variance. The basic tools of probability, including expected value and variance, are set out in Section 2 of this reading. Section 3 introduces covariance and correlation (measures o
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