Asked by Tesha Cherry on May 17, 2024
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The technique for incorporating Risk into capital budgeting that involves the use of numbers drawn randomly from probability distributions is called a:
A) probability simulation.
B) scenario analysis.
C) sensitivity analysis.
D) Monte Carlo simulation.
Monte Carlo Simulation
A statistical technique that uses random sampling and variability to calculate results for complex problems or models.
Probability Distributions
Mathematical representations that outline every potential value and their probabilities for a random variable across a specified interval.
Risk
The potential that an investment's actual return will differ from the expected return, encompassing the possibility of losing some or all of the original investment.
- Identify various methods for incorporating risk into capital budgeting, including Monte Carlo simulation.
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Learning Objectives
- Identify various methods for incorporating risk into capital budgeting, including Monte Carlo simulation.
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