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ECON 251: Financial Theory
Lecture 14  Quantifying Uncertainty and Risk
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Overview:
Until now, the models we've used in this course have focused on the case where everyone can perfectly
forecast future economic conditions. Clearly, to understand financial markets, we have to incorporate
uncertainty into these models. The first half of this lecture continues reviewing the key statistical concepts
that we'll need to be able to think seriously about uncertainty, including expectation, variance, and
covariance. We apply these concepts to show how diversification can reduce risk exposure. Next we show
how expectations can be iterated through time to rapidly compute conditional expectations: if you think the
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This note was uploaded on 02/08/2012 for the course ECON 251 taught by Professor Geanakoplos,john during the Fall '09 term at Yale.
 Fall '09
 GEANAKOPLOS,JOHN

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