Risk and Uncertainty Flashcards
What is risk?
A situation where there are a number of possible outcomes resulting from a decision or event
What is uncertainty?
situation where there is a range of possible outcomes but there is no basis upon which probabilities can be estimated
How do you calculate a simple probability?
P(event)= number of ways of achieving the event/total number of possible different outcomes
What 3 ways can you estimate probability?
Exactly-where population is certain (ie cards)
Empirically- based on historical data
Subjectively- probability someone may win for example
What does probability always equal?
1 (impossible is 0)
What is the multiplication rule with probability?
AND = can be used if the two events are independent P(A) x P(B)
What is the multiplication rule if events are dependent?
where second event is influence by outcome of the first
P(A) x P (B/A)
What is the addition rule? Only when mutually exclusive events
alternative outcomes that are equally valid
P(A) + P(B)
Addition rule of non-mutually exclusive events?
Both events can occur at the same time
P(A) + P(B) - P(A and B)
What is an expected value?
long run average- when there are a number of possible outcomes from a single event with each outcome assigned a probability
What is the formula for expected value?
EV= the total of the probability of the outcome occurring and outcome
What are the limitations of expected values?
- give a long run average and inappropriate for one-off decisions
- ignore spread of possible return since it averages outcomes
- relies of accuracy of probabilities
What are the key features of a decision tree?
decision points (where a decision has to be made) in the shape of square Outcome points (where an outcome based on probabilities happens) in the shape of a circle
How do you calculate the mean?
sum of the outcome divided by the number
How do you calculate weighted mean for ungrouped data?
times together the value and the frequency at which it occurs, then divide by the total of the frequencies
What is the mean for grouped data?
first have to find the midpoint of the value, the times that by the frequency, then divide that by the sum of the frequencies
What is the mode?
The most frequently occurring item in a population
for grouped data draw a histogram
How do you calculate the median?
value of the middle item
if the data is ungrouped always arrange it in order
What to do for the median if there is an odd number of items?
take the average of the two middle items
What is an ogive?
shows the frequency and values in plotted line- simply find where half the frequency is and draw a line and then down to x axis to find value
What is standard deviation?
shows the average spread of data around the mean, the higher the standard deviation the more widely dispersed the data is on average
How to calculate standard deviation from ungrouped data?
square root (value minus mean) squared/no. of observations
How to calculate standard deviation from frequency data? (grouped)
square route frequency x value squared divided by sum of the frequencies minus the mean squared
What is the coefficient of variation?
(standard deviation divided by the mean) x 100
measure of dispersion, shows the standard deviation as a percentage of the mean
the higher the %, the higher dispersion of data
what is the interquartile range?
difference between Q1 and Q3
What is the semi-qaurtile range?
half the difference between Q1 and Q3
What are the key characteristics of a normal distribution?
- Mean=Median=Mode
- total area under the curve represents 100%of the population (50% lies above, 50% below)
- majority of data lies near the mean
- Any are can be looked up using distribution tables
What is the Z-score?
The distance a piece of data (x) lies from the mean in normal distribution is referred to by the number of standard deviations it is from the mean
Z=(piece of data-the mean) divided by standard deviation
How to use a standard deviation table?
if you look up Z value of 1.00, then gives a figure of 0.3413 which means 34.13% of the population are within 1 standard deviation of the mean and 34.13% below so 68.26% are within that range
How do you calculate the height of a bar in a histogram?
frequency x standard(ranged) class width/actual class width
