or a millennium, mankind the world prevent or predict the
attempted to define and Great Depression and the
measure risk. subsequent World Wars and each
From the early days of Pascal and market crash that followed.
Golton to the modern forerunners Probability has 2 major flaws;
in academia, defining and Firstly, probability is based on
measuring risk has been a each outcomes being mutually
relentless pursue. Until we independent and random, resulting
properly define and measure risk, in a normal distribution and
there seems no way to secondly, probability cannot take
mathematically defeat risk, into consideration more outcomes
creating risk free financial than what was taken into
markets and economies.
consideration! Yes, that’s what
Mathematics opened up a new we all mean by being “taken by
door for mankind with the surprise” isn’t it? Mankind has
invention of probability study. indeed been “taken by surprise”
Mankind started using probability more times than we are willing to
studies in real life statistical admit.
research in the 1660s, starting
Because new information and
with a man called John Graunt. new outcomes cannot be predicted,
Gruant’s methods evolved through no studies depending on past
many hands into what insurance results and occurrences are valid
companies of today still use to in the face of new information.
calculate insurance premiums. That is why investment reports
Even though probabilistic study always states “past results do
is a useful mathematical tool for not guarantee future
defining the probability of the performance”. Uncertainty is the
occurrence of several outcomes, main component of risk. Treasury
it has certain flaws. Flaws securities are so “risk free”
rendering it useless in helping because it has a high certainty
of performance. catastrophic! When an investor is
However, risk is not only able to define what constitutes a
uncertainty of outcome but also catastrophic loss to that
the consequence of outcome.
particular investor, the investor
Too long has mankind defined will be able to use modern risk
risk based on the probability of prevention tools to create
occurrence without taking totally risk free investment
consequences into consideration! portfolios!
Uncertainty is the engine of risk
If even a 1% portfolio loss is
and consequence is the end result catastrophic to an investor, then
of risk. Consequence of risk that investor should not consider
truly defines what is risky and investing money. If one defines a
what isn’t!
particular level of catastrophic
I define risk as the risk like say, 20%, then one can
possibility of a catastrophic use methods like the Protective
loss.
Put
We live in a risky environment (http://www.optiontradingpedia.co
all the time, almost everything m/protective_put.htm) or the
we do is risky but we do it Married Put
because the possibility of a (http://www.optiontradingpedia.co
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that the negative outcome cannot strategy to ensure that one’s
be regarded as catastrophic.
stocks will never drop below the
This brings us to the true level defined as catastrophic
nature of risk; Risk is different risk! In fact, a simple stop loss
when regarded by different policy implemented portfolio wide
people. To some people, a 20% can limit losses to the level
portfolio loss is acceptable defined as catastrophic loss. If
while for some other people, that you know you can never lose more
same 20% portfolio loss is than you want to, would you still
regard your investment as
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