Week 4: Risk Flashcards
What is Risk?
An outcome resulting from an action said to be uncertain with the chance of loss
What are 4 ways of dealing with risks?
- Risk avoidance - Eliminating the risk
- Risk reduction - Minimizing the risk
- Risk transfer - Insurance/guarantors
- Risk assumption - Planned acceptance of the risk
What is Regret?
The amount of loss a person can tolerate
How do you calculate the Value of a Venture?
V = U – λR V = Value of venture U = Upside λ = Risk-adjusted constant (higher = riskier) R = Downside (regret)
How do you calculate Risk?
Risk = (I + OC) x UC I = Investment OC = Opportunity cost UC = Uncertainty
What are the 5 sources of uncertainty?
- Market uncertainty
- Organization and management uncertainties
- Product and process uncertainties
- Regulation and legal uncertainties
- Financial uncertainties
What is Lean Entrepreneurship?
- Start with a minimum viable product
- Continued successive launches adding 1-2 new features based on market
- Product is customer-driven, risk mitigated with developing wanted features
- Strategy based on willingness to shift company direction based on feedback loop (“pivot”)
What is the Scale of a Firm?
The extent of the activity of a firm as determined by some measurement of size
What is Economies of Scale?
Larger quantities of units produced/sold results in a reduced per-unit cost. (ex. When fixed costs like overhead costs are distributed over a larger quantity of units sold)
What is the Scope of a Firm?
A range of products offered or a distribution channel utilized (or both)
What is the Risk vs Return equation?
ER = Rf + R ER = Expected return Rf = Risk-free rate of return R = Risk
What is Economies of Scope?
The sharing of resources and distribution channels to produce/sell different products
