Chapter 05 · Section 5.1

Modifying The Risk Profile

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. If you could modify this risk profile, you would probably like to:

• Reduce the risk of a loss, that is reduce the probability densities of negative yields.
• Increase the chances of high returns, that is increase the probability densities associated with high yields.