Hey Mainat,

The influx of 20-something MBA's,Physicists,Mathematicians and Statisticians into Wall Street has turned the world of finance on it's heel: the driving force being innovation and changing attitudes toward risk and perceptions of the same.

Exotic financial instruments and strategies have also led to and necessitated a change in the traditional way of looking at finance concepts (e.g. your hobby horse,opportunity cost) and risk. With all due respect Mainat; things have changed.... hell even the president of the US is 'black'

The positive relationship between risk and reward still holds and the principle remains the same. The superior fund manager / investor is s/he who can deliver positive Alpha. (Risk adjusted-excess return)

+ Essentially,you deliver excess return by 'Working all resources available to you as hard and as efficiently as possible,and then some'. Ideally,no money should be idle. In your model,this is a cost.

+ You adjust for risk to measure performance....If I told you I had an investment strategy that would net you 4870% return,your next question should regard how much risk I'm 'taking' to deliver that return. Indeed,4870% returns might still be negative Alpha if the returns are too little for the risk assumed!

And if I may point out that you completely missed my point regarding upside and downside risk. The crux of the matter is that share prices follow a Lognormal distribution,ergo;

+ Returns from price appreciation of the share for a long investor are,in theory,unlimited while returns for the short from price declines of the share are bound by zero.

conversely,

+ Loss from decline in share price for the long investor are bound by zero while in theory,losses from price appreciation for the short are unlimited.

(This risk can be minimised by the use of Options)

My point is that this risk can and SHOULD be quantified and then used to ADJUST the returns arising from your punt on EQTY (as per your example)



1. Risk arises when you don't know what you're doing. 2. People diversify their portfolios to counter unsystematic risk. 3. People who diversify their portfolios don't know what they're doing.