23_OverheadsForChen1 - Objectivesfortoday Define risk and...

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ACCY 302 (Chen) Fall 2009, Class 23 1 Objectives for today Define risk and uncertainty Assess how we naturally tend to perceive and react to uncertainty Begin to identify how uncertainty should affect the analyses we use to make decisions
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ACCY 302 (Chen) Fall 2009, Class 23 2 Define risk and uncertainty From Merriam-Webster: risk: possibility of loss or peril uncertainty: lack of sureness
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ACCY 302 (Chen) Fall 2009, Class 23 3 Define risk and uncertainty  (continued) From other ACCY classes: risk: situations in which a decision is made whose consequences depend on the outcomes of future events having known probabilities uncertainty: when a decision-maker's knowledge of probabilities is inexact or lacking entirely , we say that decisions are made under uncertainty
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ACCY 302 (Chen) Fall 2009, Class 23 4 Define risk and uncertainty  (continued) Types of risk Pure Risk: No possibility of gain, only the possibility of loss from an event e.g. loss from a flood Speculative Risk: The possibility of profit or loss from an event e.g., investments Business Risk: The chance of something happening in the future that will have an impact on business objectives includes both potential profit and loss, so business risk is speculative in nature
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ACCY 302 (Chen) Fall 2009, Class 23 5 Define risk and uncertainty  (continued) Some Types of Business Risk 1) Environmental 2) Political 3) Credit 4) Competition 5) Foreign exchange 6) Price 7) Interest rate 8) Operational
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ACCY 302 (Chen) Fall 2009, Class 23 6 Discussion How do we naturally perceive and react to uncertainty?
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ACCY 302 (Chen) Fall 2009, Class 23 7 How do we naturally perceive and react to  uncertainty?  (continued) Exercise 1 A: If option 1 is adopted, exactly 200 people will be saved . If option 2 is adopted, there is a 1/3 probability that all 600 people will be saved and a 2/3 probability that no one will be saved . 1: 200 of 600 saved, 400 die 2: (1/3 x 600 saved) + (2/3 x 0 saved) = 200 saved, 400 die B,C: If option 1 is adopted, exactly 400 people will die . If option 2 is adopted, there is a 1/3 probability that nobody will die and a 2/3 probability that 600 people will die .
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This note was uploaded on 11/08/2011 for the course ACCY 302 taught by Professor Staff during the Spring '08 term at University of Illinois, Urbana Champaign.

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23_OverheadsForChen1 - Objectivesfortoday Define risk and...

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