Which of the following statements is CORRECT?
A) Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects.
B) One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring,whereas scenario analysis cannot account for probabilities.
C) Well-diversified stockholders do not need to consider market risk when determining required rates of return.
D) Market risk is important,but it does not have a direct effect on stock prices because it only affects beta.
E) Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions.

Question

Quizplus · Accepted Answer

Sensitivity analysis does not explicitly account for diversification effects, and it also does not take into account the probability of specific effects occurring, which makes options A and B incorrect. Well-diversified stockholders still need to consider market risk (systematic risk) when determining required rates of return, making C incorrect. Market risk directly affects stock prices through its impact on the cost of capital and required rates of return, making D incorrect. Simulation analysis is indeed a computerized version of scenario analysis that uses random selection of input variables based on their probability distributions, making E correct.

Which of the Following Statements Is CORRECT