(c) It is known that although variance is a widely used measure of investment risk, variance...

 

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(c) It is known that although variance is a widely used measure of investment risk, variance does not satisfy the concept of subadditivity. This means that a risk measure should reflect the fact that aggregation should lower risk through diversification. For two random variables X and Y, where Y = 3X and Var(X) = 2, show that the variance does not satisfy g(X+Y)≤g(X)+g(Y). (c) It is known that although variance is a widely used measure of investment risk, variance does not satisfy the concept of subadditivity. This means that a risk measure should reflect the fact that aggregation should lower risk through diversification. For two random variables X and Y, where Y = 3X and Var(X) = 2, show that the variance does not satisfy g(X+Y)≤g(X)+g(Y).

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Define variables X A random variable with variance 2 Y Another random variable defined as Y 3X ... View the full answer