Exhibit 14.2
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem.
-Sensitivity analysis is most useful in
A) decision-making under risk
B) decision-making under uncertainty
C) decision-making under certainty
D) all of the above

Question

Exhibit 14.2
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. 
-Sensitivity analysis is most useful in
A) decision-making under risk 
B) decision-making under uncertainty 
C) decision-making under certainty 
D) all of the above

Quizplus · Accepted Answer

Sensitivity analysis is most useful in decision-making under risk where there is uncertainty about the outcome of each alternative. In this case, there are two possible outcomes (economic expansion or decline) and the payoff for each alternative depends on the economic climate. Therefore, the investor can use sensitivity analysis to determine how changes in the economic climate will affect the expected payoff of each alternative, and make a more informed decision.

Exhibit 14.2 The Following Questions Are Based on the Information Below