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
E) None of these options

Question

Quizplus · Accepted Answer

This illustrates the flaw of averages, which is the tendency to use only the mean or most likely values of inputs without considering their distributions or potential variability. This can lead to significant underestimation or overestimation of the results.

Suppose We Compare the Difference Between the NPV of a Financial