ACCA FM · Chapter 9 · Question 4 of 8
Which of the following correctly distinguishes risk from uncertainty in investment appraisal?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Risk exists where probabilities can be assigned to possible outcomes; uncertainty exists where they cannot
Explanation
Risk describes a situation where there are several possible outcomes and probabilities can be estimated, for example from past experience. Uncertainty describes a situation where outcomes cannot be predicted or assigned probabilities with confidence. Probability-based techniques such as expected values therefore apply to risk.
More Risk and uncertainty in investment appraisal MCQs
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- Q8Which of the following is a limitation of using expected NPV to decide whether to accept a one-off project?
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