Asked by Kaeley Asbury on Jul 07, 2024
Verified
Which of the following is/are included in the list of drawbacks to using the Monte Carlo simulation for dealing with risk in capital budgeting?
A) Cash flows still have to be estimated subjectively.
B) Individual cash flows generally don't behave independently. If one cash flow turns out to be less than expected, several other may behave the same way.
C) Even after creating a distribution of probably outcomes, it is difficult to know exactly how to interpret the data.
D) Both a. and c. are drawbacks.
E) All of the above are drawbacks.
Monte Carlo Simulation
A computational technique that uses random sampling to obtain numerical results, often used to assess risk and uncertainty in financial and project management.
Subjective Estimates
Assessments or judgments made that rely on personal feelings, tastes, or opinions rather than external observable phenomena.
Probability Outcomes
The set of possible results in an experiment or situation, often quantified as likelihoods or percentages.
- Recognize different strategies for integrating risk into capital budgeting processes, such as the Monte Carlo simulation.
- Understand the limitations and obstacles associated with using simulation methods in evaluating risks.
Verified Answer
Learning Objectives
- Recognize different strategies for integrating risk into capital budgeting processes, such as the Monte Carlo simulation.
- Understand the limitations and obstacles associated with using simulation methods in evaluating risks.
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