From the course: Business Math
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Variance and the concept of risk
- 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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Low-probability events: Fear of flying, black swans, and extinction of the dinosaurs4m 57s
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Famous averages: Dow Jones and consumer prices6m 29s
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Income distribution: The difference between mean and median4m 34s
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Probabilities: Life insurance and the weather5m 53s
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Conditional probabilities and counting cards7m 20s
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Variance and the concept of risk6m 15s
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