ACCA P5 Advance Performance Management
There are various types of risks in business. E.g.
Governance risk, Operational risk, Compliance risk, Market risk, Reputational
risk, Financial risk, Audit risk etc. All risks are not quantifiable. Risks
that are quantifiable are measured by statistical tool called Standard
deviation.
Quantifiable Risk = Standard deviation
Stat is always fun to learn. Mathematical calculations are
the easy part to enhance performance in any exam. However, the conditions
presented may be distorted in order to examine the know-how of the candidate.
So, setting up the scenario, working pattern and extracting right numerical
values are very important in answering the questions. And by the end candidates
should be able to interpret and implement the values arrived by calculation in
the given scenario.
Standard deviation is statistical tool, which measures the
risk of a project/investment. Higher value of standard deviation reflects
higher risk associated with the project and lower value represents lower risk.
There is tradeoff between risk and return. Risk is directly linked to return.
Higher the risk, higher the return and lower the risk, lower the return.
Standard Error: It comes into
operation where sample is drawn with replacement from large population the
standard error of sample mean for large population. Standard deviation of the
sampling distribution of sample statistic is known as its standard error of the
statistic.
Standard Error of mean = Standard
Deviation /(sample size 1/2)
……… sample with replacement
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Uncertainty: As life is uncertain so do the business
activities. Like risk not every uncertain condition are quantifiable. However,
there are numerous so called quantifiable situations where we can use various
statistical tools to evaluate the best possible situation that matches
individual’s choice. These are described below with links provided for detail
study:
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Payoff Table and Decision Tree: I
love to say that – “Table is made of tree. / Tree is used to make table. This statement
is just an informal connotation to reflect interrelationship between Payoff
table and Decision Tree. Visit the link provided for detailed subject matters.
ACCA Article: The risks of uncertainty - part 2
ACCA Article: The risks of uncertainty - part 1
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