Rob wrote: > Onya, Doug! Although I hadn't realised enough NASDAQ companies were > projecting dividends to allow the calculation. And would that be Fisher > Black, the dude you chide in WS for calculating risk in terms of deviation > from an expected return, rather than factoring in a notion inferred by the > rest us when we hear the word; ie. 'loss'
These two notions are closely related Rob. If the returns are normally distributed, then knowing this deviation, or as they say, volatility, is same as knowing how much you will lose with what probability. Of course, there are two issues here: a) how realistic is it to assume that the returns are normal? b) how reliable is your volatility forecast? The latter is the more important question. You either forecast your volatility using historical prices or look at the current prices of some securities and based on these prices and some rocket scientific formulas, back out some implied volatilities. This is why risk models don't work when the world gets risky. Life is much more than just numbers. Didn't someone say it is a social relation? By the way, below is an excerpt from an Economist article: "What happens next is hard to predict, not least because of Enron's opaqueness. If nothing else, the on-off marriage with Dynegy bought time for firms to reduce their exposure to Enron. That has probably ensured that there is little systemic threat to the financial system of the sort once posed by LTCM. There are even hopes of minimal disruption to the energy market, and thus to the real economy. Even so, there was a brief, but unfounded, moment of anxiety in Britain that there could have been a power shortage on November 29th after Enron pulled out of the energy market." Full article is at: http://www.economist.com/agenda/displayStory.cfm?Story_ID=894167 Best, Sabri Oncu
