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Quantitative Finance by Matt Davison

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Chapter 2

Intuition about Uncertainty and Risk

2.1 CHAPTER SUMMARY

This chapter is divided into four sections, followed by some references and a small set of questions. The objective of the chapter is to build some intuition about risk. This builds to Chapter 3, which describes some classical decision making under uncertainty protocols. After a short introduction in Section 2.2, Section 2.3 provides a sequence of intuition-building questions designed to get the reader thinking about risk, return, and time—the three factors of investment decisions. Expected values are suggested as a tool for gathering problem insights. Section 2.4 describes a classical risk paradox introduced by Euler, the St. Petersburg Paradox. This paradox shows the limit ...

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