A) Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects.
B) One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring, whereas scenario analysis cannot account for probabilities.
C) Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions.

Question

A) Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects. 
B) One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring, whereas scenario analysis cannot account for probabilities. 
C) Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions.

Quizplus · Accepted Answer

This statement accurately describes simulation analysis and distinguishes it from sensitivity analysis and scenario analysis. The other two statements are either incorrect or incomplete. A diversification effect is not explicitly taken into account in sensitivity analysis, while scenario analysis can account for different probabilities of specific effects occurring if necessary.

A) Sensitivity Analysis Is a Good Way to Measure Market