Academics, however, like to define investment risk differently, averring that it is the relative volatility of a stock or portfolio of stocks-that is, their volatility as compared to that of a large universe of stocks. Employing data bases and statistical skills, these academics compute with precision the beta of a stock-its relative volatility in the past-and then build arcane investment and capital-allocation theories around this calculation. In their hunger for a single statistic to measure risk, however, they forget a fundamental principle: It is better to be approximately right than precisely wrong.
- Warren Buffett
www.berkshirehathaway.com
Spot on.
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