Risk Is Path Dependent

Yesterday, I discussed how both laypeople and finance professionals evaluate the riskiness of an investment the same way. More importantly, changing the volatility of an investment didn’t materially change the perception of risk. What did influence the perception of risk was the skewness of the investment. Investments with positive skewness, i.e. payoffs like a lottery with many small losses and potentially large increases, are regarded as less risky than investment with negative skewness.

This finding suits nicely with one of the most important top features of risk that is commonly forgotten by investment specialists: our conception of risk depends on the circumstances. Have a look at the chart below. It shows the development of two investments over one year. Both investments have the same return and the same volatility, but one investment (the dark blue line) has negative skewness while the other (light blue) has positive skewness.

  • 5 x 2.5 ie 18.75
  • It is authorized with SEBI
  • Margin trading raises your level of market risk
  • Commodities fraud
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  • Founders: Galit Laibow, Greg Fleishman, Sarah Michelle Gellar
  • Otherwise intervene to ensure that the bank’s capital levels are sufficient
  • Go Digital

Thus, a financial adviser must constantly drive against a confluence of factors that reinforce one another and create a sense of urgency to do something in the face of a short-term downturn. This is what buyer education should concentrate on, in my own view. The tools that achieve these goals are assorted. Visualisations of hypothetical or historical shows in financial markets that can be discussed to make traders alert to path-dependency are a good starting point. Putting short-term shows in financial markets into a long-term context, consistent with the traders time horizon is another important tool.

Do EGM products have lower gross margins? Gross margins are down a little but, but not that much really. But it appears like technology and content cost has been trending up too. So even if a few of these things are one time factors, it seems across the board. The best thing, though, is the claim that AMZN is buying market share and quantity with free delivery, Amazon Prime and things such as that. Below is the table of shipping revenues (shipping fees charged to customers) and shipping expense (what AMZN pays to deliver products to customers). So that it seems that there is truth to AMZN’s buying of market share via free delivery.

This is big, since operating margins have only averaged 4.1% since 2003. Net delivery costs have increased 2.5% since 2003, so that by itself may account for a large part of the decline in working margins. So what do we have? We’ve increasing sales, but with declining margins, increasing world wide web shipping and other costs. Will AMZN have the ability to keep increasing sales and market talk about without increasing bonuses like subsidized shipping? I have no idea. AMZN is betting that customer devotion credited to these bonuses shall permit them to make back revenue later. Will AMZN have the ability to increase margins support without reducing these incentives?

I suspect that with the Kindle, increasingly more of the fullfillment centers will be dealing with eletronics and other general merchandise rather than books and CDs, that will migrate to the Kindle and other digital distribution eventually. At that true point, will AMZN have a moat still? AMZN’s moat was it’s incredible distribution centers for books/CD’s.