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Dear sir,
In Jun 2011, examiner asked to discuss three ways of incorporating risk into the investment appraisal process.
The examiner’s report and Recommended Answer recommended the following 3 methods: Sensitivity analysis, probability analysis, and the CAPM.
I have two questions:
1. We studied that sensitivity deals with uncertainty. Is it correct to mention sensitivity when the question asks for risks?
2. Can we mention simulation which deals with risks, if no other method comes in mind in exam?Thanks,
Sensitivity analysis measures how critical individual factors are to a decision. As such they are relevant for both uncertainty and risk.
(Risk is when we know the probabilities of various outcomes, but there are still various outcomes (and in real life the probabilities themselves will always be uncertain)).Certainly do mention simulation and you would get credit for it.
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