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Winning the Loser’s Game, 6th edition: Timeless Strategies for Successful Investing by Charles Ellis

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CHAPTER 11INVESTMENT RISKS

RISK IS SUCH A SIMPLE LITTLE WORD THAT IT IS AMAZING how many different meanings are given to it by different users.

Risk is different from uncertainty. Risk describes the expected payoffs when their probabilities of occurrence are known. Actuarial mortality tables are a familiar example. The actuary does not know what will happen in 14 years to Mr. Frank Smith, but does know quite precisely what to expect for a group of 100 million people as a group—in each and every year. “Riskiness” in investing, by contrast, is akin to uncertainty, and that’s what the academics mean when they discuss beta (relative volatility) and market risk. Too bad they don’t use the exact terms.

Risk is both in the markets and in the individual ...

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