Flashcards in Chapter 9 -Risk and uncertainty Deck (15)

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1

##
What is described below?

There are a number of possible outcomes and the probability of each outcome is known.

### Risk

2

##
What is described below?

There are a number of possible outcomes but the probability of each outcome is not known.

### Uncertainty

3

## What are three strengths of sensitivity analysis?

###
-Not complicated to understand

-Enables subjective judgement

-Identifies crucial success areas

4

## What are three weaknesses of sensitivity analysis?

###
-Assumes variables can change independently

-Does not look at probability of variables changing

-Does not point in direction of correct decision

5

## What are 4 main drawbacks of simulation?

###
-Only obtains more info, does not make decisions

-Models can be complex

-Can cost more to construct than benefit achieved

-May be difficult to formulate

6

## What are 3 advantages of expected values?

###
-Takes uncertainty into account

-Single number easier for decision making

-Calculations are simple

7

## What are 3 disadvantages of expected values?

###
-Probabilities are subjective

-EV has little meaning for one off project

-Does not show other possible outcomes

8

## Where do you put the decision variable in a profit/payoff table?

### Along the top

9

## What does the Maximax method do?

### Maximizes the maximum payoff achievable?

10

## What sort of investors use Maximax rule?

### Risk seekers

11

## What does the Maximin method do?

### Maximises the minimum payoff achievable

12

## Who is the maximin method good for

### Risk averse pessimists who want to minimise losses

13

## What is regret?

### The opportunity loss for having made the wrong decision

14

## What does the minimax regret strategy do?

### Minimises the maximum regret

15