Brain Pain I Flashcards
WHAT is the expected monetary value of an event?
THIS is the payoff of the event times the probability the event will occur (and adding the products)
WHAT are the political risks of investing in a foreign country?
(1) Threat of expropriation of the firm’s assets
(2) Destruction of assets in rebellions in third-world nations
(3) Limitations on the repatriation of profits (or even initial investments)
WHAT does a negative coefficient correlation of -1.0 mean?
Perfect negative correlation (–1.0) means that the two variables always move in the opposite direction
Thus, given perfect negative correlation, unsystematic risk would, in theory, be eliminated
WHAT are States of Nature?
Based on decision theory
Uncontrollable future events that can affect the outcome of a decision
WHAT is the risk associated with the ability to sell an investment in a short period of time without significant price concessions?
“Liquidity Risk”
i.e. This is the risk/ possibility that an asset cannot be sold on short notice
WHAT tool/ theory may be used to estimate how inventory warehouse costs are affected by both the number of shipments and weight of materials handled?
Multiple Regression Analysis
WHY - Because Multiple Regression Analysis involves the use of a linear equation (i.e. estimating inventory warehouse costs involves both a dependent variable and independent variables)
WHAt is Expected Value Analysis?
AN estimate of future monetary value based on forecasts
i.e. An arithmetic mean using the probabilities as weights
EQUATION: Expected value multiplied by the probability of each outcome and summing the products
WHAT is a widely used approach managers use to recognize uncertainty about individual items;
- and to obtain an immediate financial estimate of the consequences of possible prediction errors?
THIS is called Sensitivity Analysis
i.e. Sensitivity analysis examines how the model’s outcomes change as the parameters change
WHAT is a key consideration/ most useful when risk is being prioritized?
THE Expected Value
i.e. This is the predicted value for a given investment
Thus, through this analysis investors can choose the scenario that is most likely to give them their desired outcome
WHAT is the expected monetary value of an act?
IT is the sum of the conditional profit (loss) for each event times the probability of each event’s occurrence
i.e. It estimates future monetary value based on forecasts and their related probabilities of occurrence
WHAT is a technique used for determining the optimal safety stock levels for an inventory item?
THEY can use the “Monte Carlo Simulation”
WHY? - Because Monte Carlo simulation generates individual values for a random variable
WHAT is a forecasting method that relies heavily on judgment?
THIS is the “Delphi” Technique
e.g. This tool can be used in situations where a group of experts could reach a consensus when the decisive factors were subjective
WHAT is the expected value for decision making under conditions of uncertainty?
THIS is the weighted average of probable outcomes of an action
e.g. You find expected value by multiplying the probability of each possible outcome by its payoff and summing the products
In theory WHAT coefficients of correlation would eliminate unsystematic risk in an investment portfolio?
THIS would be -1.0
WHY? - Because Perfect negative correlation (–1.0) means that the two variables always move in the opposite direction
Hence; with perfect negative correlation, unsystematic risk is, in theory, eliminated
WHAT cost is likely to go up, if a product required a great deal of electricity to produce and crude oil prices increased?
THIS would likely increase the Conversion Costs
WHY? - Because studies have shown a correlation between electricity prices and crude oil prices
