Chapter 05 · Section 5.1

Risk Profiles and Probability

A risk profile shows the probability densities that correspond to each possible profit or loss level.

The green line corresponds to the risk profile of a atypical diversified portfolio. E. g. this risk profile shows that, for the considered portfolio,

• The highest probability density corresponds to a yield of 5%
  (N.B. this is not the expected yield, but the yield With the highest probability density)
• Yields of more than 20% should not be expected.
• There is a great probability of making a loss with such a portfolio (the probability densities for negative yields are too high to be neglected).