EC260 Lecture Notes - Lecture 9: Relative Risk, Standard Deviation, Risk Premium
Document Summary
Lesson 3. 1: risk analysis: risk and probability. Risk: hazard or chance of experiencing a loss. Risk associated with an action increases the bigger the chance of a loss or the greater the size of a potential loss. Probability: likelihood or chance that an event will take place. Frequency definition of probability: e. g. obtaining any 6 possible outcomes of rolling a single die is 1/6. Not realistic to repeat experience over and over again. Subjective definition of probability: probability of a certain outcome is the degree of confidence a manager has that this outcome will occur. Probability distribution: when all possible outcomes are listed and a probability of occurrence is assigned to each possible outcome is profit with ith possible outcome, pi is probability of ith outcome occurring, and n is number of possible outcomes. Allows managers to decide which set of actions is preferred: road map to decision making.
