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How to calculate Risk probability?

Updated: 10/25/2022
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10y ago

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"Risk probability" does not quite make sense, perhaps you mean just how to calculate risk. There are many formulas and methods, a lot of them highly complex mathematical models. Risk calculation is an important subset of portfolio theory.

For the simplest cases, consider some of the following definitions:

* the greatest dive that a stock took over a given historical time period. For example, if stock A dropped 30% maximum over past 5 years before rebounding, and stock B dropped 40% maximum over the same period - then by this metric you can see that stock B is riskier.

* standard deviation of the returns over a historical time period. Take as your data set the prices a stock assumed over the last 5 years daily. You can calculate the standard deviation of this data set. The standard deviation is a measure of risk.

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Q: How to calculate Risk probability?
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