CMA Pop Quiz #145: Investment Decisions

Here is the answer to this week’s quiz:

Which of the following approaches compares high-yield investments and allows values to be plotted on a frequency distribution graph?

A. Linear programming.
B. Sensitivity analysis.
C. Regression analysis.
D. Simulations.

Correct Answer D

Simulations can be used to compare multiple risky investments. The net present value (NPV) or the internal rate of return (IRR) for each project can be simulated several times and averaged. NPVs, IRRs, and standard deviations can be computed and ranked. Repetition allows values to be plotted on a frequency distribution graph to show the distribution and provides a reasonable assessment about the risk level of a project.


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