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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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