Every item written into a firmâ€™s profit and loss account and its balance sheet is a stochastic variable with a probability distribution derived from probability distributions for each factor of production. Using this approach we are able to derive a probability distribution for any measure used in valuing companies and in evaluating strategic investment decisions. Indeed, using this evaluation approach we are able to calculate expected gain, loss and their probability when investing in a company where the capitalized value (price) is known.

Risk, when does it occurs? Whenever the outcome of a situation is not 0 or 1 you have uncertainty. Investment decisions taken under these circumstances involve a probability for an outcome that will differ from your estimated target. Decisions taken under uncertainty are a reality and a constraint manager’s face. In order to reduce the risk (probability of gain/loss) you have basically two ways of doing it, reduce the exposure or try to reduce the uncertainty by gathering more information.