Week 4: Risk

Question 1

What is Risk?

Answer 1

An outcome resulting from an action said to be uncertain with the chance of loss

Question 2

What are 4 ways of dealing with risks?

Answer 2

1. Risk avoidance - Eliminating the risk
2. Risk reduction - Minimizing the risk
3. Risk transfer - Insurance/guarantors
4. Risk assumption - Planned acceptance of the risk

Question 3

What is Regret?

Answer 3

The amount of loss a person can tolerate

Question 4

How do you calculate the Value of a Venture?

Answer 4

V = U – λR 
V = Value of venture 
U = Upside 
λ = Risk-adjusted constant (higher = riskier) 
R = Downside (regret)

Question 5

How do you calculate Risk?

Answer 5

Risk = (I + OC) x UC 
I = Investment 
OC = Opportunity cost 
UC = Uncertainty

Question 6

What are the 5 sources of uncertainty?

Answer 6

1. Market uncertainty
2. Organization and management uncertainties
3. Product and process uncertainties
4. Regulation and legal uncertainties
5. Financial uncertainties

Question 7

What is Lean Entrepreneurship?

Answer 7

1. Start with a minimum viable product
2. Continued successive launches adding 1-2 new features based on market
3. Product is customer-driven, risk mitigated with developing wanted features
4. Strategy based on willingness to shift company direction based on feedback loop (“pivot”)

Question 8

What is the Scale of a Firm?

Answer 8

The extent of the activity of a firm as determined by some measurement of size

Question 9

What is Economies of Scale?

Answer 9

Larger quantities of units produced/sold results in a reduced per-unit cost. (ex. When fixed costs like overhead costs are distributed over a larger quantity of units sold)

Question 10

What is the Scope of a Firm?

Answer 10

A range of products offered or a distribution channel utilized (or both)

Question 11

What is the Risk vs Return equation?

Answer 11

ER = Rf + R
ER = Expected return 
Rf = Risk-free rate of return 
R = Risk

Question 12

What is Economies of Scope?

Answer 12

The sharing of resources and distribution channels to produce/sell different products