Q14.1 Define the following terms:
A. Probability distribution
B. Expected value
C. Standard deviation
F. Diminishing marginal utility of money
G. Certainty equivalent
H. Risk-adjusted discount rate
I. Decision tree J. Simulation
Q14.2 What is the main difficulty associated with making decisions solely on the basis of comparisons of expected returns?
Q14.3 The standard deviation measure of risk implicitly gives equal weight to variations on both sides of the expected value. Can you see any potential limitations of this treatment? Q14.4 "Utility is a theoretical concept that cannot be observed or measured in the real world. Hence, it has no practical value in decision analysis." Discuss this statement.
Q14.5 Graph the relation between money and its utility for an individual who buys both household fire insurance and state lottery tickets. Q14.6 When the basic valuation model is adjusted using the risk-free rate, i, what economic factor is being explicitly accounted for?
Q14.7 If the expected net present value of returns from an investment project is $50,000, what is the maximum price that a risk-neutral investor would pay for it? Explain.
Q14.8 "Market estimates of investors' reactions to risk cannot be measured precisely, so it is impossible to set risk-adjusted discount rates for various classes of investment with a high degree of precision." Discuss this statement.
Q14.9 What is the value of decision trees in managerial decision making?
Q14.10 When is it most useful to use game theory in decision analysis?
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