CHAPTER   11

The Role of Risk

Opportunity is missed by most people because it is dressed in overalls and looks like work.

—Thomas Edison

From the academic view of the markets, return gets paired with either Beta or standard deviation (volatility) as a measure of risk. But when using volatility as a definition of risk, one must believe that risk is the difference amongst returns or, more precisely, the average of these differences each period from the average expected return. But is it? Expected return is the mean of the distribution; it is the one guess that has the least average error. To an engineer manufacturing parts, being too big or too small is truly an error and unacceptable; to a meteorologist, being a few degrees above or below the ...

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