The hypotenuse and corporate risk modeling

This working paper uses the concept of the hypotenuse to explain how companies facing several risk variables often overlook the fact that one or two of them can have a disproportionate influence in relation to the others. In mathematics, the long side of a right-angled triangle influences the hypotenuse much more than the short side. Ditto, when modeling risk or volatility factors, companies should consider the proportions represented by the different factors, because the outcomes can be greatly affected.

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