Profitability and Risk of a Financial Transaction

The chapter “Profitability and Risk of a Financial Transaction” studies the relationship between profitability and risk of a financial transaction. In this regard, the role of uniform and normal distribution is studied, as well as the correlation of financial transactions and methods for reducing the risk of financial transactions, such as diversification and hedging. A formula for profitability for several periods is derived. Situations with complete and partial uncertainty are studied using consequence and risk matrices. The rule of maximizing the expected average profit, the rule of minimizing the expected average risk and the optimal (Pareto) financial transaction, and the Laplace principle of equal probability are described.