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    Capital Rationing & Risk and Return

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    Sanskriti yadav
    Capital rationing involves placing limits on funds allocated to projects to ensure money is used efficiently and cash shortages are avoided. Risk and return are positively correlated, with higher risk investments potentially offering higher returns. Techniques for decision-making under uncertainty include single point estimates, scenario analysis, break-even analysis, and decision trees. Scenario analysis considers multiple outcomes instead of single estimates, while decision trees graphically show decisions over time under risk.

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    Capital Rationing & Risk and Return

    Uploaded by

    Sanskriti yadav
    20 views7 pages
    Capital rationing involves placing limits on funds allocated to projects to ensure money is used efficiently and cash shortages are avoided. Risk and return are positively correlated, with higher risk investments potentially offering higher returns. Techniques for decision-making under uncertainty include single point estimates, scenario analysis, break-even analysis, and decision trees. Scenario analysis considers multiple outcomes instead of single estimates, while decision trees graphically show decisions over time under risk.

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    Capital rationing involves placing limits on funds allocated to projects to ensure money is used efficiently and cash shortages are avoided. Risk and return are positively correlated, with higher risk investments potentially offering higher returns. Techniques for decision-making under uncertainty include single point estimates, scenario analysis, break-even analysis, and decision trees. Scenario analysis considers multiple outcomes instead of single estimates, while decision trees graphically show decisions over time under risk.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    20 views7 pages

    Capital Rationing & Risk and Return

    Uploaded by

    Sanskriti yadav
    Capital rationing involves placing limits on funds allocated to projects to ensure money is used efficiently and cash shortages are avoided. Risk and return are positively correlated, with higher risk investments potentially offering higher returns. Techniques for decision-making under uncertainty include single point estimates, scenario analysis, break-even analysis, and decision trees. Scenario analysis considers multiple outcomes instead of single estimates, while decision trees graphically show decisions over time under risk.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
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    Capital Rationing

    Capital rationing is undertaken by a firm in order to


    place limits or restrictions on the amount of money
    and other resources earmarked for a particular
    project or investment.
    The goal of capital rationing is to ensure that money
    is allocated to its best use and to ensure that the
    enterprise will not run short of cash.
    Concept of Risk and return
    The relationship between risk and return is a fundamental
    investment concept. The concept states that an increased
    probability for return is highly correlated with the increase
    in the level of risk taken.
    The return is expressed as a percentage and refers to the
    gains or losses made from an investment, whereas the risk
    element is associated with the volatility of that return. In
    theory, an investor could expect higher return on
    investment only if willing to accept a higher level of risk.
    Techniques of decision making under Risk and
    Uncertainty

    •Single point estimates


    •Scenario analysis
    •Break even analysis
    •Decision trees
    Single Point Estimates

     The single point estimate uses a single estimate of each


    unknown to determine our performance measure.  This
    often is similar to using averages to make decisions. 
     When using single point estimates we only get one
    output value for each alternative.
     If we want to maximize the performance measure, such
    as net present value (NPV), we simply choose the
    alternative with the highest NPV.
    Scenario Analysis

    This method takes the single point estimate and goes a few
    steps beyond.  Instead of using a single point estimate for each
    unknown, the model is calculated many times while changing the
    input variables.  When deciding under uncertainty, usually we are
    looking at worst case, most likely, and best case scenarios.
     For decision making under risk, we determine several discrete
    outcomes from the model and assign a probability to each
    outcome.
    Break Even Analysis

     Break even analysis reverses the modeling


    process.  We start by setting output to our break
    even point, and solve for the input variables.  This
    method doesn't tell us anything about the
    probability of risk, or success.  It merely gives the
    decision maker a sense of where they stand
    relative to downside/upside.
    Decision Trees
    Decision Trees are best for projects that involve decisions over time. 
    These result in many possible outcomes.  Decision trees are inherently for
    decision making under risk since we must assign probabilities for each
    node emanating from a chance node.  Decision trees also can incorporate
    the alternatives into one graphic showing the decisions to be made.
    n a decision tree, squares represent decision points.  Circles represent
    uncertainty, hence they are called chance nodes.  The outcomes
    emanating from a chance node are uncertain so we assign probabilities to
    each outcome.  End nodes are final outcomes, and are represented by
    triangles.

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