CFA Level 1 Exam: Stand-Alone Risk Measurement Technique

Stand-Alone Risk Measurement Technique

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Question

Ace Consulting, a multinational corporate finance consulting firm, is performing an analysis of the East Asian distribution network of Smith, Kleen, and

Beetchnutty. Specifically, Ace Consulting is trying to identify the effect of changes in specific variables on the overall efficiency of SKB's distribution process. In their analysis, Ace Consulting identified a "base case" situation using the expected values for each input. Then, Ace modified each variable a few points above and below the base case, holding other variables constant. This was done in an effort to determine the effect of each variable on the overall efficiency of SKB's distribution process. Which of the following choices correctly describes this stand-alone risk measurement technique?

Answers

Explanations

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A. B. C. D. E. F.

Explanation

In this example, Ace consulting has been conducting a sensitivity analysis. This analysis begins with the identification of a "base case" situation using expected values for each input. Then, a variable is manipulated holding the other variables constant, in an effort to determine the sensitivity of the output to manipulations in each variable. Sensitivity analysis is the most widely used technique for measuring stand-alone risk, and can be performed relatively easily using a commercially available spreadsheet package such as Microsoft Excel.

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