Suppose we compare the difference between the NPV of a financial model in which the means are entered for all input random variables and the NPV of a financial model in which the most likely values are entered for all input random variables.If we see a large difference between the NPV's,this illustrates:
A) the value at risk (VAR)
B) the effect of randomness
C) the flaw of averages
D) the bias of the analyst

Question

Suppose we compare the difference between the NPV of a financial model in which the means are entered for all input random variables and the NPV of a financial model in which the most likely values are entered for all input random variables.If we see a large difference between the NPV's,this illustrates:
A) the value at risk (VAR) 
B) the effect of randomness 
C) the flaw of averages 
D) the bias of the analyst

Quizplus · Accepted Answer

This illustrates the flaw of averages, which refers to the fact that using only point estimates (such as means or most likely values) to represent inherently uncertain variables can lead to misleading results. It highlights the importance of conducting a sensitivity analysis to understand how different values of input variables can affect the output. It is not related to the value at risk, the effect of randomness or the bias of the analyst.

Suppose We Compare the Difference Between the NPV of a Financial