Colleagues,
Allan Reese's account of how oil reserves are combined reminds me of a
problem that I encountered in Financial Statistics some years ago. In
the financial world, variance equates to risk. If the total risk is
required for a number of risky assets then, assuming independence
between assets, the correct procedure is of course to add the variances.
However, at that time (but I have no idea whether this is still the
case), there was a regulatory requirement to use the sum of the
standard deviations.
Allan
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Dr. Allan White, Statistical Advisory Service, University of Birmingham
Tel. 0121-414 4750 or 44750 (internal), Email [log in to unmask]
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