14 Risk and Uncertainty

Question 1

What is the definition of risk?

Answer 1

Number of possible outcomes resulting from a decision or event

Question 2

What is the definition of uncertainty?

Answer 2

Where there could be a range of possible outcomes but there is no basis on which probabilities can be estimated

Question 3

What is the equation for the likelihood of an event occuring?

Answer 3

number of ways of achieving an event/ total number of possible different outcomes

Question 4

What are the three different ways probabilities can be estimated?

Answer 4

1. Exactly
2. Empirically (based on historical data)
3. Subjectively

Question 5

What is conditional probability?

Answer 5

Chance of an event occuring given the fact that other events have already taken place.

Question 6

What is expected values?

Answer 6

this is a long run average. It is the weighted average of a probability distribution

Question 7

What are the limitations of expected values?

Answer 7

1. Give a long run average results => inappropiate for one-off decisions.
2. Ignore the spread of possible returns
3. Relies on accuracy of probabilities

Question 8

What is the equation for working out the height of the bar on a histogram?

Answer 8

Height of bar = frequency x standard class width/ actual class width