WFU Law School
Law & Valuation
2.2 Risk of a Single Asset

2.2.1 Probability Distribution

Assessing the risk of an asset requires that we have some sense for the range of possible outcomes. For example, a judge sentencing a youthful offender might consider the likelihood of different scenarios:
  • worst case (pessimistic), the offender will commit only another minor crime;
  • expected case (normal), she will commit no more crimes
  • best case (optimistic), she will prevent others from committing crimes

Given this distribution, the judge might suspend the youthful offender's sentence.

Predicting a range of outcomes and assigning to them different probabilities can give further insight into risk. Using a probability distribution, we can model different outcomes. For example, the probability distribution of the results of throwing two dice is shown in the table to the right --

Example

Result
Probability
2
1/36 = 2.8%
3
2/36 = 5.6%
4
3/36 = 8.3%
5
4/36 = 11.1%
6
5/36 = 13.9%
7
6/36 = 16.7%
8
5/36 = 13.9%
9
4/36 = 11.1%
10
3/36 = 8.3%
11
2/36 = 5.6%
12
1/36 = 2.8%
Total
36/36 = 100%

The most likely throw is a 7 - but it happens only one-sixth of the time. Possible outcomes range from 2 to 12, although the likelihood of throwing a 2 or 12 is significantly lower than throwing a 7. What if you wanted to throw at least a 7? You would have to consider variability in assessing risk. Even though 7 would be the most frequent throw, you might throw less. In fact, there is a 41.6% chance that you will throw less than a 7.

2.2 Risk of a Single Asset

©2003 Professor Alan R. Palmiter

This page was last updated on: March 16, 2004