- CFA Exams
- CFA Level I Exam
- Study Session 7. Corporate Finance (1)
- Reading 19. Capital Budgeting
- Subject 3. Risk analysis of capital investments - stand-alone methods

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**CFA Practice Question**

Which of the following statements with respect to risk analysis techniques is false?

A. Sensitivity analysis illustrates the impact on the dependent variable by only changing one independent variable, while holding all other independent factors constant.

B. Scenario analysis requires the calculation of a few possible outcomes, which is followed by the assignment of probabilities of these various outcomes actually occurring.

C. The advantage that a Monte Carlo analysis has over the other techniques is that it does away the need to assign subjective probabilities to the various random variables.

**Explanation:**A Monte Carlo simulation will run the most number of scenarios with each scenario having nothing held constant. It actually requires the assignment of probabilities to the various random variables involved in calculating NPV. Assigning probabilities sets parameters, which then influence how the simulation can draw random numbers for that variable.

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**User Contributed Comments**
2

User |
Comment |
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biitii |
I'm finding it hard to agree with b). Wouldn't you FIRST assign the probs for each scenario and THEN calculate to avoid any bias? Otherwise the assignment might geht influenced by the outcomes... |

nieuwed |
I agree with you. |