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Probability analysis can be used to assess the uncertainty associated with the project. Why is it false?Uncertainty can be said to increase with project life, while risk increases with the variability of returns. What is variability of returns? what about the relationship between risk and Fixed returns?
Uncertainty is where you know what you expect to happen, but you are not sure – it could end up being different.
Risk is where you know that there are several possible outcomes and you know the probability of each of them happening.The variability of returns is how different they might be from the average.
Suppose in one case the returns might be 90 or 110.
In another case they might be 50 or 150.
(in both cases with an equal probability of occurring).The both have the same average of 100, but the variability in the second case is much more than in the first.
There is no relationship between risk and fixed returns – if the returns are fixed then there is no risk.
This was just 2 marks out of the whole exam (and is unlikely to ever be more than 2 marks). It is not something to be too worried about.
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