Chapter 5 and 6

Chapter 5 and 6 - Chapter 5 Describing Risk o...

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Chapter 5 Describing Risk o Probability- the likelihood that a given outcome will occur; can depend on the nature of the uncertain event, on the beliefs of the people involved, or both; measures expected value and variability Objective- relies on the frequency with which certain events tend to occur Subjective- the perception that an outcome will occur; may be based on a person’s judgment or experience, but not necessarily on the frequency with which a particular outcome has actually occurred in the past o Expected Value- probability weighted average of the payoffs (value associated with a possible outcome) associated with all possible outcomes E(X)=Pr1X1+Pr2X2 o Variability- the extent to which possible outcomes of an uncertain event differ Deviation-difference between expected payoff and actual payoff Measure variability by calculating standard deviation-square root of the weighted average of the squares of the deviations of the
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Chapter 5 and 6 - Chapter 5 Describing Risk o...

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