Skip to content

ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk

Brenmoor Ltd is considering a project with three possible outcomes: a profit of $400,000 with probability 0.5, a profit of $100,000 with probability 0.3, and a loss of $200,000 with probability 0.2. What is the expected value of the project, and what does it fail to show?

The expected value is $190,000, calculated as 200,000 plus 30,000 less 40,000. It is a probability-weighted average, so it does not reveal the spread of outcomes or the risk of loss, such as the 20% chance of losing $200,000.

  1. A$190,000; it does not show the spread or variability of outcomesCorrect
  2. B$300,000; it does not show the average outcome
  3. C$190,000; it shows the worst-case loss
  4. D$100,000; it does not show the spread or variability of outcomes

Explanation

EV = 0.5 x 400,000 + 0.3 x 100,000 + 0.2 x (-200,000) = 200,000 + 30,000 - 40,000 = $190,000. Expected value is an average and hides dispersion, such as the 20% chance of a loss. The $300,000 option wrongly ignores the probabilities of the loss and treats the outcomes as simple highs.

Did you get it right without looking?

One question tells you little. A timed set on Identification, assessment and measurement of risk shows your real accuracy, how long you take and where you lose marks.

Practise Identification, assessment and measurement of riskFree diagnostic mock

More Identification, assessment and measurement of risk questions