Chapter 9 -Risk and uncertainty Flashcards Preview

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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

How do you calculate the value of perfect information?

Expected profit with information
Less: Expected profit without information