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Risk & Uncertainty Outline

Risk & Uncertainty Outline - Jenai Davis MAN...

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Jenai Davis MAN 3533-302 RISK AND UNCERTAINTY OUTLINE I. Introduction A. Values for rates, weights, costs etc. have normally been assumed certain, but because they really are not, it is proper to conduct sensitivity analysis to deal with risk and uncertainty. II. Sensitivity Analysis (SA) A. Estimates a) Optimistic estimates over total range b) Pessimistic estimates over total range B. MoM a) Uncertain results due to uncertain input values b) Range is determined by SA c) Sensitivity to change is determined by input for MoM III. Optimistic and Pessimistic Estimates A. Most common approach dealing with uncertainty a) Optimistic is favorable
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b) Pessimistic is conservative IV. Sequential Decisions (Decision Trees) A. Overview/Approach a) Identify decision points and alternatives b) Identify point of uncertainty and types of outcomes c) Estimate necessary values for the analysis d) Analyze all alternatives e) Collapse values back to initial decision point f)Find alternative that maximizes NPW of future cash flows B.
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