Risk and Uncertainty in Decision Making

Question 1

It involves situations or events that may or may not occur, whose probability can be calculated statistically, and whose frequency of occurrence can be predicted from records.

Answer 1

Risk

Question 2

Pertains to situations or events whose outcome cannot be predicted with statistical confidence.

Answer 2

Uncertainty

Question 3

It exists when several outcomes are possible and past events are available to estimate the probability of occurrence.

Answer 3

Risk

Question 4

A decision-maker interested in obtaining the best returns regardless of risk.

Answer 4

Risk Seeker

Question 5

A decision-maker who assumes that the worst outcome will occur.

Answer 5

Risk-averse

Question 6

A decision-maker concerned with all possible outcomes and chooses the strategy with the highest Expected Value.

Answer 6

Risk Neutral

Question 7

It is the financial forecast of the outcome of a course of action multiplied by the probability of achieving that outcome.

Answer 7

Expected Value

Question 8

Expected value is expressed as a value ranging from what?

Answer 8

0-1

Question 9

Which expected value should be selected when choosing among several options?

Answer 9

Highest Expected Value

Question 10

What can be determined when deciding over several options and each option has a range of possible outcomes?

Answer 10

Varying possibilities

Question 11

Are there situations where possibilities are not available?

Answer 11

Yes

Question 12

When do situations where probabilities are not available exist?

Answer 12

• When there’s lack of historical information
• When a company faces uncertainty rather than risk

Question 13

What techniques could be used where uncertainty is incorporated into decision-making?

Answer 13

1. Maximin
2. Maximax
3. Minimax Regret

Question 14

Its objective is to maximize the minimum return that the company can get.

Answer 14

Maximin

Question 15

Its objective is to maximize the maximum return that the company can get.

Answer 15

Maximax

Question 16

Which can be calculated from opportunity cost?

Answer 16

Regret

Question 17

Which decision-makers choose Maximin?

Answer 17

Risk-averse

Question 18

Which decision-makers choose Maximax?

Answer 18

Risk Seekers

Question 19

Decisions are made to minimize what?

Answer 19

The maximum opportunity cost or regret of making the wrong decision.

Question 20

It is the information that is guaranteed to predict the future with certainty.

Answer 20

Perfect Information

Question 21

When do perfect information is available?

Answer 21

When there’s market research

Question 22

What is one drawback of perfect information?

Answer 22

It takes resources

Question 23

How do you get the value of perfect information?

Answer 23

Value of perfect information (VOPI) = EV (with perfect information) - EV (no perfect information)

Question 24

Is perfect information perfect?

Answer 24

While market research can yield reasonably accurate information, perfect information is never perfect

Question 25

When is the gap between perfect information and actual results determined?

Answer 25

After making decisions

Question 26

It is the gap between perfect information and actual results.

Answer 26

Imperfect information

Question 27

Is this imperfect information better than no information?

Answer 27

Yes

Question 28

What should be prepared to quantify the risks to be assessed if two variables are risky?

Answer 28

A joint probability table

Question 29

What table can allow management to analyze possible outcomes?

Answer 29

Joint Probability Table

Question 30

These tables do not provide a clear decision to the administration but are useful to show the effects of two variables on the risk being taken.

Answer 30

Joint Probability Table

Question 31

These are excellent decision-making tools that provide a structure to lay out the options and outcomes of choosing these options.

Answer 31

Decision Trees

Question 32

It presents a clear picture of the risks and rewards of each option, allowing management to choose between several courses of action.

Answer 32

Decision Trees

Question 33

How do you evaluate decision trees?

Answer 33

* Calculate the expected values at outcome points * Choose the highest profits at decision points

Question 34

Limitations of Decision Tree

Answer 34

1. Since it is based on EVs, it has the same disadvantages as all EV techniques 2. HIghly dependent on the use of probabilities, which are also based on estimates. 3. It tends to oversimplify reality and ignore other factors affecting success or failure.

Question 35

Standard Deviations can measure what?

Answer 35

Risk

Question 36

It is calculating how far the outcomes deviate from the mean.

Answer 36

Standard Deviation

Question 37

What do higher standard deviations indicate?

Answer 37

More dispersion and higher risk

Question 38

It measures the standard deviation as a percentage of the mean.

Answer 38

Coefficient of variation

Question 39

It is useful in comparing the dispersion of two sets of data.

Answer 39

Coefficient of variation

Question 40

What does a higher percentage mean in coefficient of variation?

Answer 40

Higher dispersion

Question 41

What techniques can the management use to quantify and assess risk when dealing with uncertainties?

Answer 41

Quantitative Techniques

Question 42

It is a quantitative technique that allows for an alternative risk assessment method.

Answer 42

Sensitivity Analysis

Question 43

This analysis allows management to focus on the key variables that would change the decision for review.

Answer 43

Sensitivity Analysis

Question 44

What are the two approaches when making a sensitivity analysis?

Answer 44

1. Compute the maximum percentage change in a variable before the decision would change. 2. Assess if the decision would change given the change in the variable.

Question 45

Sensitivity Analysis is used by management to depict a "What if" analysis by examining what?

Answer 45

How the profit would change when the budgeted amounts are not achieved or an underlying assumption changes

Question 46

Sensitivity analysis allows the management to look at the results by changing what?

Answer 46

Key variables or estimates

Question 47

The sensitivity analysis should provide management with a better understanding of what?

Answer 47

1. Profit/Loss of the Company 2. What factors are more sensitive to the profit/loss

Question 48

What are the what-if questions when a model profit/loss is constructed?

Answer 48

1. What if the actual sales are only 60% of the targeted sales? How will it impact my bottom-line profit/loss? 2. What if the cost of materials increased by 20% of the budgeted cost? How will it impact my bottom-line profit/loss?

Question 49

It is one of the limitations of a sensitivity analysis.

Answer 49

It can only be used to assess changes in one variable at a time.

Question 50

Many variables may be uncertain in what?

Answer 50

Real-life scenarios

Question 51

What can be generated using computers and random numbers to simulate real-life events?

Answer 51

Simulation Models

Question 52

It can be used to estimate a variable that management believes to be relevant.

Answer 52

Simulation

Question 53

It is a model used to predict the probability of different outcomes when random variables may intervene.

Answer 53

Monte Carlo Simulation

Question 54

What technique can understand the impact of risk and uncertainty in prediction and forecasting models.

Answer 54

Monte Carlo Simulation