Professional Documents
Culture Documents
A few salient concepts and measures Risk: The chance that some unfavorable event will occur; Probability distribution: A listing of all possible outcomes, or events, with a probability (chance of occurrence) assigned to each outcome; Expected rate of return: The rate of return expected to be realized from an investment; the mean value of the probability distribution of possible results.
Standard deviation (): A statistical measurement of the variability of a set of observations. Coefficient of variation: Standardized measure of the risk per unit of return; calculated as the standard deviation divided by the expected return. Risk aversion: A dislike for risk. Risk averse investors have higher required rates of return for higher risk investments.
Stand-alone risk
Easier to compute than within firm risk or market risk; It is generally a good proxy for hard to measure market risk; In firms much time is spent to compute the stand alone risk.
Scenario analysis
A risk analysis technique in which bad and good sets of financial circumstances are compared with a most likely, or base case situation.
It certainly is an improvement on sensitivity analysis as, at least, three possible scenarios are considered. However, the world is much more complex and there are an innumerable number of possible scenarios to be considered.
A risk analysis technique in which probable future events are simulated on a computer, generating estimated rates of return and risk indices.
Self work
Revise knowledge on the basics of Capital Budgeting. Read Chapter 3 Part II Re-work the case McReath Corpoartion B Work an assortment of end of chapter exercises that matches with the above case