Deck 12: Decision-Making Under Conditions of Risk and Uncertainty

Question 1

Which of the following is NOT a feature of a probability distribution?

A)a value of 0 for an event denotes a nil likelihood of occurrence
B)a value of 1 for an event signifies absolute certainty
C)the total of the probabilities for all possible events listed in the distribution can vary
D)a probability distribution attempts to provide a list of all possible outcomes

Answer 1

C

Question 2

Which of the following statements is untrue regarding a probability distribution?

A)it will show all possible outcomes and their probabilities
B)it can be used to provide an indication of the risk of undertaking a possible course of action.
C)it will show the average outcome that is expected to occur
D)it will enable an estimate of the most likely outcome to be derived

Answer 2

C

Question 3

The decision rule under the maximin criterion is to:

A)Select the alternative that has the best outcome should the worst event occur.
B)Select the alternative that has the best average outcome.
C)Select the alternative that has the best outcome should the best event occur.
D)Select the alternative that has the best chance of maximising the return.

Answer 3

A

Question 4

The maximum amount that is worth paying to obtain additional information consists of:

A)the expected price of the information.
B)the difference between the expected value if the information is acquired compared with the expected value with the absence of the information.
C)an amount equal to the most likely benefit that the information will provide.
D)an amount equal to the highest benefit that the information will provide.

Question 5

Which of the following assumptions apply when making decisions on the basis of expected values:

A)the decision must be a 'one-off'.
B)there must be many possible outcomes.
C)it is based on the assumption that the decision will be repeated many times.
D)none of the above.

Question 6

The following represent a tutor's estimate of the probability of students A, B, C and D failing an examination. Which student does the tutor consider has the best chance of passing the examination?

A)student A = 0
B)student B = 0.5
C)student C = 0.6
D)student D = 0.2

Question 7

The most likely outcome represents:

A)the expected value.
B)the actual outcome.
C)the average outcome that is expected to occur.
D)the outcome with the highest probability.

Question 8

Which of the following is NOT a measure of uncertainty?

A)the standard deviation of the probability distribution
B)an examination of the probability distribution
C)the expected value
D)the coefficient of variation

Question 9

In a decision tree the boxes refer to:

A)The point at which decisions have to be taken.
B)Possible alternative courses of action.
C)The point at which environmental changes occur that affect the consequences of prior decisions.
D)The possible types of environment that may occur.

Question 10

The expected value represents:

A)the weighted average of the possible outcomes.
B)the most likely outcome.
C)the outcome with the highest probability.
D)none of the above.

Question 11

The joint probability of two events occurring together is:

A)the sum of the probabilities of the two events.
B)the higher probability of the two events.
C)the average of the probability for the two events.
D)the probability of one event times the probability of the other event.

Question 12

Which of the following represent states of nature?

A)a potential set of outcomes expressed in monetary terms
B)the most likely result that is going to occur
C)a list of potential courses of action that can be undertaken
D)a list of different conditions that might be experienced relating to the economy such as recession, boom etc.

Question 13

The following represent the expected values and standard deviations for alternatives a-d. Which alternative has the highest absolute risk?

A)Alternative A has an expected profit of £100,000 and a standard deviation of £18,000
B)Alternative B has an expected profit of £300,000 and a standard deviation of £75,000
C)Alternative C has an expected profit of £500,000 and a standard deviation of £70,000
D)Alternative D has an expected profit of £700,000 and a standard deviation of £60,000

Question 14

Under what circumstances can risk reduction NOT be achieved from combining investments?

A)Where the projects are perfectly positively correlated
B)Where the projects are perfectly negatively correlated
C)Where the projects have low levels of positive correlation
D)Where the projects have low levels of negative correlation

Question 15

Which of the following best describes objective probabilities?

A)repeating an experiment that exactly simulates the decision and using the data to derive the probability
B)obtaining an estimate from an expert
C)using a firm of management consultants to provide the value of the probability
D)none of the above