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ACCA Applied Skills · Performance Management · Dealing with risk and uncertainty in decision-making

A company uses Monte Carlo simulation to model project NPV with random variables for sales volume and unit cost. Which statement about the technique is correct?

Simulation repeatedly samples values of uncertain variables using random numbers tied to their probability distributions, producing a distribution of possible outcomes. It shows the range and likelihood of results but does not remove uncertainty or guarantee an optimal decision.

  1. AIt guarantees the optimal decision by removing uncertainty
  2. BIt produces a distribution of possible outcomes by repeatedly sampling from probability distributions using random numbersCorrect
  3. CIt requires only a single most likely value for each variable
  4. DIt can only be used when variables are independent of each other and have equal probabilities

Explanation

Simulation repeatedly samples random values for uncertain variables using random numbers mapped to probability distributions, giving a range of outcomes and their likelihood. It does not eliminate uncertainty or guarantee optimal decisions, and it does not need one point estimate.

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