A common approach of estimating the variability of returns involving forecasting the pessimistic, most likely, and optimistic returns associated with the asset is called
A) break-even analysis.
B) marginal analysis.
C) financial statement analysis.
D) sensitivity analysis.

Question

Quizplus · Accepted Answer

This approach is called sensitivity analysis, which involves forecasting the pessimistic, most likely, and optimistic returns associated with the asset to estimate the impact of changes in variables on the returns. It helps to understand the risk associated with the investment and make informed decisions. A is incorrect because break-even analysis is used to determine the level of sales required for the company to break even, not to estimate the variability of returns. B is incorrect because marginal analysis involves analyzing the changes in costs and revenues due to a change in production level, not estimating the variability of returns. C is incorrect because financial statement analysis involves analyzing the financial statements to evaluate the financial health of the company, not estimating the variability of returns.

A Common Approach of Estimating the Variability of Returns Involving