What effect does decreasing the standard deviation in daily cash flows have on the cash return point in the Miller-Orr model?
A) It will cause the cash return point to increase.
B) It will cause the cash return point to decrease.
C) It has no impact on the cash return point.
D) It will cause the cash return point to first decrease, then increase.

Question

Quizplus · Accepted Answer

Decreasing the standard deviation in daily cash flows reduces the variability of cash flows, which in turn lowers the risk of cash balances falling below the minimum level. In the Miller-Orr model, this leads to a decrease in the cash return point, as less cash is needed on hand to safely cover potential shortfalls.

What Effect Does Decreasing the Standard Deviation in Daily Cash