CFA® Level 1 Exam: Which Statement is Correct?

CFA® Level 1 Exam: Statement Correctness

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Question

Which of the following statements is correct?

Answers

A. The primary advantage of simulation analysis over scenario analysis is that scenario analysis requires a relatively powerful computer, coupled with an efficient financial planning software package, whereas simulation analysis can be done using a PC with a spreadsheet program or even a calculator.

B. All of these answers are correct.

C. Sensitivity analysis is incomplete because it fails to consider the range of likely values of key variables as reflected in their probability distributions.

D. In comparing two projects using sensitivity analysis, the one with the steeper lines would be considered less risky, because a small error in estimating a variable, such as unit sales, would produce only a small error in the project's NPV.

E. Sensitivity analysis is a risk analysis technique that considers both the sensitivity of NPV to changes in key variables and the likely range of variable values. C

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Explanations

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A. B. C. D. E.

Explanation

A project's stand-alone risk depends on (1) the sensitivity of NPV to changes in key variables and (2) the range of likely values of these variables as reflected in their probability distribution. Sensitivity analysis considers only the first factor.

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