CFA Practice Question

There are 155 practice questions for this study session.

CFA Practice Question

Which statement is TRUE?
A. Simulations always lead to better decisions because they provide distribution in the expected value.
B. In simulations, we should discount cash flows at a risk-adjusted rate, in most cases.
C. Well-planned and executed simulations always yield better estimates of expected value than conventional risk-adjusted value models.
Explanation: A is false. It is common to make mistakes, such as double-counting risk or making decisions based upon the wrong types of risk.

B is true. In most cases we should use a risk-adjusted rate in simulations, but there is one exception. When we use the standard deviation in values from a simulation as a measure of investment risk, we should use the risk-free rate.

C is false. The expected values from simulations should be fairly close.

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