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Risk Analysis

The document discusses risk analysis and probability concepts. It defines risk and uncertainty, and examines sources of business risk. It also covers probability distributions, expected value, standard deviation, coefficient of variation, and attitudes towards risk such as risk aversion, neutrality, and seeking.

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Aim Atienza
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9 views33 pages

Risk Analysis

The document discusses risk analysis and probability concepts. It defines risk and uncertainty, and examines sources of business risk. It also covers probability distributions, expected value, standard deviation, coefficient of variation, and attitudes towards risk such as risk aversion, neutrality, and seeking.

Uploaded by

Aim Atienza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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RISK ANALYSIS

3.1 The Concept of Risk and Uncertainty


3 Common Features

• The manager should be aware


of all available actions.
3 Common Features

• Determine the consequences


of each action.
3 Common Features

• Formulate a criterion for


assessing each outcome.
Uncertainty is acknowledged in expressions
such as “it is likely,” “the odds are,” “there is
an outside chance,” and so on.
PROBABILITY has been described as the
mathematical language of uncertainty.
If there is no way to assign any
probabilities to future random events,
we are addressing pure uncertainty.
Sources of Business Risk
Sources of Business Risk

1. General economic situations.


Uncertainty concerning the future
course of the macroeconomy.
Sources of Business Risk

2. Information asymmetry of
competitor’s actions.
A firm’s own technological
breakthrough may bring about
considerably increased sales.
Sources of Business Risk

3. Impulses of consumers demand.


Successful products of one year or
one season may become the
discarded.
Sources of Business Risk

4. Company costs and expenses.


The company cannot be sure what
the prices of its factors of production.
3.2 Probability Concepts
Basis for Assessment

1. Objective notion. The notion of a


probability as a long-run frequency.
Basis for Assessment

2. Subjective notion. It should be evident that in


many, and perhaps most, situations, there is no
chance that a situation will be repeated.
According to the subjective view, the probability
of an outcome represents the decision maker’s
degree of belief that the outcome will occur.
Subjective probability simply represents the decision
maker’s best assessment, based on current
information, of the likelihood of an uncertain event.
Measurement of Risk
A probability distribution
describes, in percentage
terms, the chances of all
possible occurrences.
The expected value E(v) associated with an uncertain
situation is a weighted average of the payoffs.
Illustration 3.1. Filipino Tech, Inc.
Illustration 3.2. Benham Rise Ltd.
Illustration 3.3. Jose Corp.
Illustration 3.4. Peso Equity Mutual Funds A and B
Standard deviation ()
Reflects the variation of
possible outcomes from
this average.
Illustration 3.5. Peso Equity Mutual Funds A and B
Illustration 3.6. Project A and B
Suppose Project A
• expected return = P1 million
• standard deviation = P1,000.
Alternativey, Project B
• expected return = f P1,000
• standard deviation = P900.
Coefficient of variation (v)

When comparing decision alternatives with


costs and benefits that are not of
approximately equal size, the coefficient of
variation measures relative risk.
Illustration 3.7. Project A
and Project B
Illustration 3.8. Companies
ABC and XYZ
Attitude Towards Risk
• Risk aversion
• Risk neutrality
• Risk seeking
Relation of Money to Utility
Diminishing marginal utility of money.
SUMMARY

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