| Core Concept |
| Maximise factors you can control.
Minimise factors you can't (e.g. are random or chaotic) |
| Diversification |
| Principle of variance optimisation ("all eggs not in one basket")
Make investments in areas so as to minimise co-variances
Challenge is accurately determining variances a priori |
|
| Insurance |
| Principle of paying a small premium to compensate future losses should the worst happen.
Kenneth Arrow theory: making everything insurable would facilitate risk-taking |
| Futures |
| based on Black-Scholes theory
Counterparts with opposite requirements can reduce each others' risk
Originally intended as a means to cover risk, can make money - but very risky! |
|
|
|
