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46 Cards in this Set

  • Front
  • Back
absolute risk
Overall dispersion of possible payoffs
Measure of the systematic variability of one asset’s returns with returns on other assets
business risk
Chance of loss associated with a given managerial decision
certainty equivalent
Assured sum that equals an expected risky amount in utility terms
certainty equivalent adjustment factor, a
Ratio of a certain sum divided by an expected risky amount, where both dollar values provide the same level of utility
chance events
Possible outcomes following each decision point
computer simulation
Use of computer software and workstations or sophisticated desktop computers to create outcome scenarios
cost of uncertainty
Minimum expected opportunity loss
credit risk
Chance that another party will fail to abide by its contractual obligations
cultural risk
Chance of loss because of product market differences due to distinctive social customs
currency risk
Loss due to changes in the domestic-currency value of foreign profits
decision points
Instances when management must select among choice alternatives
decision tree
Map of a sequential decision-making process
derivative risk
Chance that volatile financial derivatives such as commodities futures and index options could create losses in underlying investments by increasing rather than decreasing price volatility
diminishing marginal utility
When additional increments of money bring ever smaller increments of added benefit
Dutch auction
Winning bidder is the first participant willing to pay the auctioneer’s price
economic risk
Chance of loss due to the fact that all possible outcomes and their probability of occurrence are unknown
English auction
Most familiar type of auction where an auctioneer keeps raising the price until a single highest bidder remains
expected value
Anticipated realization
expropriation risk
Danger that business property located abroad might be seized by host governments
game theory
Study of human interaction and decision strategy
government policy risk
Chance of loss because foreign government grants of monopoly franchises, tax abatements, and favored trade status can be tenuous
inflation risk
Danger that a general increase in the price level will undermine the real economic value of any legal agreement that involves a fixed promise to pay over an extended period
interest-rate risk
Market risk that stems from the fact that changing interest rates affect the value of any agreement that involves a fixed promise to pay over a specified period
liquidity risk
Difficulty of selling corporate assets or investments that have only a few willing buyers or are otherwise not easily transferable at favorable prices under typical market conditions
market risk
Chance that a portfolio of investments can lose money because of swings in the financial markets as a whole
maximin criterion
Decision choice method that provides the best of the worst possible outcomes (also a secure strategy)
minimax regret criterion
Decision choice method that minimizes the maximum possible regret (opportunity loss) associated with a wrong decision after the fact
normal distribution
Symmetrical distribution about the mean or expected value
opportunity loss
Difference between a given payoff and the highest possible payoff for the resulting state of nature
payoff matrix
Table that shows outcomes associated with each possible state of nature
Chance of occurrence
probability distribution
List of possible events and probabilities
relative risk
Variation in possible returns compared with the expected payoff amount
risk aversion
Desire to avoid or minimize uncertainty
risk neutrality
Focus on expected values, not return dispersion
risk premium
Added expected return for a risky asset over that of a riskless asset
risk seeking
Preference for speculation
risk-adjusted discount rate
Risk-free rate of return plus the required risk premium
risk-adjusted valuation model
Valuation model that reflects time-value and risk considerations
sealed-bid auction
Auction where all bids are secret, and the highest bid wins
sensitivity analysis
Limited form of computer simulation that focuses on important decision variables
standardized variable
Variable with a mean of 0 and a standard deviation equal to 1
When the outcomes of managerial decisions cannot be predicted with absolute accuracy but all possibilities and their associated probabilities of occurrence are known
Vickrey auction
Where the highest sealed bid wins, but the winner pays the price of the second-highest bid
winner’s curse
Where overly aggressive bidders pay more than the economic value of auctioned off items