Uncertainity And Risk: Literature Review: Frank H. Knight

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Literature Review.

Risk has been with defined differently over the decades. Frank H. Knight (1921) argues that there is a difference between uncertainty and risk. According to Knight, risk is a combination of the likelihood of an occurrence of a hazardous event, meaning an event that could cause harm in terms of losses or undesirable outcome, and its magnitude.

Knight also proposes that it is possible to calculate the probability a risk, which makes it measureable .Uncertainty on the other hand is characterized as the existence of more than one possibility in the future, but unlike risk, uncertainty is not measureable.

Hubbard (2007) further affirms Knights position by defining uncertainty as The lack of complete certainty, that is, the existence of more than one possibility i.e. the true outcome value is not known. He also defines risk as a state of uncertainty where some of the possibilities involve loss, catastrophe or other undesirable outcome.

This section will focus on risk and various methods of calculating
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Because of this limitation in using variance as a risk measurement, various downside-risk measurements have been proposed and developed. One of the downside risk measurements is semi variance. By definition, a downside-risk measurement measures only the returns below a certain threshold. This threshold captures the risk perspectives from investors to investors. Unlike standard deviation, downside risk accommodates different views of risk.

Markowitz however suggests, variance has an edge over other downside risk measures “with respect to cost, convenience, and familiarity. The difference in cost, Markowitz (1959) argues, is given by the fact that efficient sets based on down side risk took, back then, two to four times as much computing time as those based on variance. The difference in convenience, in turn,

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