Risk and Uncertainty

Question 1

What is risk?

Answer 1

A situation where there are a number of possible outcomes resulting from a decision or event

Question 2

What is uncertainty?

Answer 2

situation where there is a range of possible outcomes but there is no basis upon which probabilities can be estimated

Question 3

How do you calculate a simple probability?

Answer 3

P(event)= number of ways of achieving the event/total number of possible different outcomes

Question 4

What 3 ways can you estimate probability?

Answer 4

Exactly-where population is certain (ie cards)
Empirically- based on historical data
Subjectively- probability someone may win for example

Question 5

What does probability always equal?

Answer 5

1 (impossible is 0)

Question 6

What is the multiplication rule with probability?

Answer 6

AND = can be used if the two events are independent P(A) x P(B)

Question 7

What is the multiplication rule if events are dependent?

Answer 7

where second event is influence by outcome of the first

P(A) x P (B/A)

Question 8

What is the addition rule? Only when mutually exclusive events

Answer 8

alternative outcomes that are equally valid

P(A) + P(B)

Question 9

Addition rule of non-mutually exclusive events?

Answer 9

Both events can occur at the same time

P(A) + P(B) - P(A and B)

Question 10

What is an expected value?

Answer 10

long run average- when there are a number of possible outcomes from a single event with each outcome assigned a probability

Question 11

What is the formula for expected value?

Answer 11

EV= the total of the probability of the outcome occurring and outcome

Question 12

What are the limitations of expected values?

Answer 12

• 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

Question 13

What are the key features of a decision tree?

Answer 13

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

Question 14

How do you calculate the mean?

Answer 14

sum of the outcome divided by the number

Question 15

How do you calculate weighted mean for ungrouped data?

Answer 15

times together the value and the frequency at which it occurs, then divide by the total of the frequencies

Question 16

What is the mean for grouped data?

Answer 16

first have to find the midpoint of the value, the times that by the frequency, then divide that by the sum of the frequencies

Question 17

What is the mode?

Answer 17

The most frequently occurring item in a population

for grouped data draw a histogram

Question 18

How do you calculate the median?

Answer 18

value of the middle item

if the data is ungrouped always arrange it in order

Question 19

What to do for the median if there is an odd number of items?

Answer 19

take the average of the two middle items

Question 20

What is an ogive?

Answer 20

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

Question 21

What is standard deviation?

Answer 21

shows the average spread of data around the mean, the higher the standard deviation the more widely dispersed the data is on average

Question 22

How to calculate standard deviation from ungrouped data?

Answer 22

square root (value minus mean) squared/no. of observations

Question 23

How to calculate standard deviation from frequency data? (grouped)

Answer 23

square route frequency x value squared divided by sum of the frequencies minus the mean squared

Question 24

What is the coefficient of variation?

Answer 24

(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

Question 25

what is the interquartile range?

Answer 25

difference between Q1 and Q3

Question 26

What is the semi-qaurtile range?

Answer 26

half the difference between Q1 and Q3

Question 27

What are the key characteristics of a normal distribution?

Answer 27

• 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

Question 28

What is the Z-score?

Answer 28

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

Question 29

How to use a standard deviation table?

Answer 29

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

Question 30

How do you calculate the height of a bar in a histogram?

Answer 30

frequency x standard(ranged) class width/actual class width