Econ Chapter 16

Front 1

absolute risk

Back 1

Overall dispersion of possible payoffs

Front 2

beta

Back 2

Measure of the systematic variability of one asset’s returns with returns on other assets

Front 3

business risk

Back 3

Chance of loss associated with a given managerial decision

Front 4

certainty equivalent

Back 4

Assured sum that equals an expected risky amount in utility terms

Front 5

certainty equivalent adjustment factor, a

Back 5

Ratio of a certain sum divided by an expected risky amount, where both dollar values provide the same level of utility

Front 6

chance events

Back 6

Possible outcomes following each decision point

Front 7

computer simulation

Back 7

Use of computer software and workstations or sophisticated desktop computers to create outcome scenarios

Front 8

cost of uncertainty

Back 8

Minimum expected opportunity loss

Front 9

credit risk

Back 9

Chance that another party will fail to abide by its contractual obligations

Front 10

cultural risk

Back 10

Chance of loss because of product market differences due to distinctive social customs

Front 11

currency risk

Back 11

Loss due to changes in the domestic-currency value of foreign profits

Front 12

decision points

Back 12

Instances when management must select among choice alternatives

Front 13

decision tree

Back 13

Map of a sequential decision-making process

Front 14

derivative risk

Back 14

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

Front 15

diminishing marginal utility

Back 15

When additional increments of money bring ever smaller increments of added benefit

Front 16

Dutch auction

Back 16

Winning bidder is the first participant willing to pay the auctioneer’s price

Front 17

economic risk

Back 17

Chance of loss due to the fact that all possible outcomes and their probability of occurrence are unknown

Front 18

English auction

Back 18

Most familiar type of auction where an auctioneer keeps raising the price until a single highest bidder remains

Front 19

expected value

Back 19

Anticipated realization

Front 20

expropriation risk

Back 20

Danger that business property located abroad might be seized by host governments

Front 21

game theory

Back 21

Study of human interaction and decision strategy

Front 22

government policy risk

Back 22

Chance of loss because foreign government grants of monopoly franchises, tax abatements, and favored trade status can be tenuous

Front 23

inflation risk

Back 23

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

Front 24

interest-rate risk

Back 24

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

Front 25

liquidity risk

Back 25

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

Front 26

market risk

Back 26

Chance that a portfolio of investments can lose money because of swings in the financial markets as a whole

Front 27

maximin criterion

Back 27

Decision choice method that provides the best of the worst possible outcomes (also a secure strategy)

Front 28

minimax regret criterion

Back 28

Decision choice method that minimizes the maximum possible regret (opportunity loss) associated with a wrong decision after the fact

Front 29

normal distribution

Back 29

Symmetrical distribution about the mean or expected value

Front 30

opportunity loss

Back 30

Difference between a given payoff and the highest possible payoff for the resulting state of nature

Front 31

payoff matrix

Back 31

Table that shows outcomes associated with each possible state of nature

Front 32

probability

Back 32

Chance of occurrence

Front 33

probability distribution

Back 33

List of possible events and probabilities

Front 34

relative risk

Back 34

Variation in possible returns compared with the expected payoff amount

Front 35

risk aversion

Back 35

Desire to avoid or minimize uncertainty

Front 36

risk neutrality

Back 36

Focus on expected values, not return dispersion

Front 37

risk premium

Back 37

Added expected return for a risky asset over that of a riskless asset

Front 38

risk seeking

Back 38

Preference for speculation

Front 39

risk-adjusted discount rate

Back 39

Risk-free rate of return plus the required risk premium

Front 40

risk-adjusted valuation model

Back 40

Valuation model that reflects time-value and risk considerations

Front 41

sealed-bid auction

Back 41

Auction where all bids are secret, and the highest bid wins

Front 42

sensitivity analysis

Back 42

Limited form of computer simulation that focuses on important decision variables

Front 43

standardized variable

Back 43

Variable with a mean of 0 and a standard deviation equal to 1

Front 44

uncertainty

Back 44

When the outcomes of managerial decisions cannot be predicted with absolute accuracy but all possibilities and their associated probabilities of occurrence are known

Front 45

Vickrey auction

Back 45

Where the highest sealed bid wins, but the winner pays the price of the second-highest bid

Front 46

winner’s curse

Back 46

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