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46 Cards in this Set
 Front
 Back
absolute risk

Overall dispersion of possible payoffs


beta

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 domesticcurrency value of foreign profits


decision points

Instances when management must select among choice alternatives


decision tree

Map of a sequential decisionmaking 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


interestrate 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


probability

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


riskadjusted discount rate

Riskfree rate of return plus the required risk premium


riskadjusted valuation model

Valuation model that reflects timevalue and risk considerations


sealedbid 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


uncertainty

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 secondhighest bid


winner’s curse

Where overly aggressive bidders pay more than the economic value of auctioned off items
