From the course: Business Math

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Variance and the concept of risk

Variance and the concept of risk

From the course: Business Math

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Variance and the concept of risk

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- What is risk? One way to think about risk is as the uncertainty about what will happen in the future. From the standpoint of statistics, we can think of risk as the variability in potential future payoffs from some decision, from making an investment, hiring a key person, or launching a new product. For example, consider two potential real estate investments. Real estate investment number one, an office building in the central business district. This is a stable area which has been the heart of the business district for 30 years. Real estate investment number two, undeveloped piece of land in an unfinished industrial park on the edge of town. In this context, unfinished means it's empty land full of weeds, and mud, and a few wooden surveyor stakes in the ground indicating where the roads, the sewer lines, and the power lines are going to be in the future, maybe. Which of these two possible real estate investments is associated with more risk? In other words, for which of the two is…

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