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Volatility (often defined in terms of standard deviation of returns, or in terms of implied volatility from option markets) is indeed one measure of risk, but like any single measure of risk, it is incomplete. Part of the reason for this is that in financial markets, the returns are not normally distributed but rather have "fat tails." This means that ...


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Note that $\beta$ is the coefficient of the portfolio regressed on the benchmark. That is \begin{align*} r_P = \alpha+\beta r_B + \varepsilon, \end{align*} where $\varepsilon$ is the residual. The standard deviation of the residual is called the residual risk. Specifically, \begin{align*} std(\varepsilon) &= \sqrt{var(r_P-\beta r_B-\alpha)}\\ &=\sqrt{...



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