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)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

Simulation analysis is a method where the computer generates random input values for the variables that affect a particular outcome, and each time the simulation is run, the output value is recorded. The distribution of output values over many runs then enables an estimate of the likelihood that the output value will fall above or below a certain threshold, such as a target level of profit. It considers the probability distribution of input variables, but scenario analysis does not account for probabilities explicitly. Sensitivity analysis does not take into account diversification effects. Therefore, option C is the correct statement.

Which of the Following Statements Is Correct