Chapter

Quantifying risk

Mark H. A. Davis

in Mathematical Finance: A Very Short Introduction

Published in print January 2019 | ISBN: 9780198787945
Published online January 2019 | e-ISBN: 9780191829932 | DOI: https://dx.doi.org/10.1093/actrade/9780198787945.003.0002

Series: Very Short Introductions

Quantifying risk

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A large part of the purpose of the financial markets is to manage, and indeed profit from, risk—the uncertainty surrounding future events, any event, in fact, that affects the views of investors as to the value of securities. ‘Quantifying risk’ reviews the main ideas of probability theory, explaining random variables, normal distribution, standard deviation, strong law of large numbers, and the central limit theorem. It also discusses ‘subjective probability’ or probability as degree of belief, which are based around so-called Dutch Book Arguments that concern the existence or otherwise of arbitrage strategies. It concludes with an explanation of stochastic modelling.

Keywords: arbitrage; central limit theorem; normal distribution; probability; standard deviation; stochastic model

Chapter.  5213 words.  Illustrated.

Subjects: Economics ; Mathematics ; Mathematical Finance

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