Q14.1 Define the following terms:

A. Probability distribution

B. Expected value

C. Standard deviation

D. Coefficient of variation

E. Risk

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?

Was this article helpful?

0 0
Your Retirement Planning Guide

Your Retirement Planning Guide

Don't Blame Us If You End Up Enjoying Your Retired Life Like None Of Your Other Retired Friends. Already Freaked-Out About Your Retirement? Not Having Any Idea As To How You Should Be Planning For It? Started To Doubt If Your Later Years Would Really Be As Golden As They Promised? Fret Not Right Guidance Is Just Around The Corner.

Get My Free Ebook

Post a comment