M B A 8620 Chapter Notes - Chapter 14: Weighted Arithmetic Mean, Risk Neutral, Risk Premium

• School: Clemson University
• Department: Business Administration
• Course: M B A 8620
• Professor: Ron Gregory

Document Summary

Ch 14 managerial decision making under uncertainty. A probability is a number between 1 and 0 that indicates the likelihood that a particular outcome will occur. If outcomes are mutually exclusive and exhaustive exactly one of these outcomes will occur and the probabilities must add up to 100% Pro(cid:271)a(cid:271)ility is the a(cid:272)tual (cid:272)ha(cid:374)(cid:272)e that a(cid:374) out(cid:272)o(cid:373)e (cid:449)ill o(cid:272)(cid:272)ur, (cid:373)a(cid:374)agers do(cid:374)"t k(cid:374)o(cid:449) the true probability so they have to estimate it. Frequency: = the frequency (that it rained, n = number of years that it rained on july 4th, n = the total number of years for which he has data for. Subjective probability, often we lack a history of repeated events that allows us to calculate frequencies: when events occur very infrequently, we cannot use a frequency calculation to predict probability. We use whatever information we have to form a subjective probability, which is the best estimate. (best informed guess)