Chapter 27 discusses finance, or the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk. We were given the equation to find future value (assuming the account was being compounded), which is FV=(1+r)^y * PV. To get present value, one would just divide. The chapter then discussed managing risk in regards to risk aversion (those whose pain of loss exceeds pleasure of winning), the markets for insurance (where the goal is to spread risks around more efficiently, but it faces adverse selection and moral hazard), diversification of firm-specific risk (reducing risk by replacing a single risk with a large number of smaller, unrelated risks), and the trade-off between risk and return (stocks offer higher potential risk and return).
The standard deviation part confused me a bit. I know a variable typically stays within two standard deviations of its average about 95 percent of time, but I just remember this as a fact. I haven't really applied it to anything, so I was confused when the book said,"thus, while actual returns are centered around 8 percent, they typically vary from a gain of 48 percent to a loss of 32 percent." Otherwise, the chapter was fine but I want to go over the math.
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