Match List-I with List-II:

List-I (Methods of Risk Analysis)	List-II (Meaning)
A. Sensitivity Analysis	I. A computer generates a very large number of scenarios according to the probability distribution of variables.
B. Scenario Analysis	II. Provides a way to present different possibilities so that we can be sure that decisions made today take proper account of what we can do in the future.
C. Simulation Analysis	III. Analyzing the project's NPV (or IRR) for a given change in one of the variables at a time.
D. Decision Tree Analysis	IV. Analyzing the project's NPV (IRR) for a given change in a combination of variables.

Choose the correct answer from the options given below:

Correct option is B

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  A. Sensitivity Analysis → III

  • Sensitivity analysis evaluates how changes in one input variable at a time affect the overall outcome, such as NPV or IRR in a project.
  • It helps in identifying which variables have the most impact on the decision-making process.

• B. Scenario Analysis → IV

  • Scenario analysis involves analyzing the impact of multiple variables changing simultaneously.
  • This method is used to assess different possible outcomes based on various economic, financial, or operational scenarios.

• C. Simulation Analysis → I

  • Simulation analysis uses a computer-generated model to create multiple scenarios based on a probability distribution of variables.
  • Monte Carlo Simulation is a popular technique in this category.

• D. Decision Tree Analysis → II

  • Decision Tree Analysis helps in presenting different possibilities visually to make an informed choice.
  • It ensures that today's decisions account for possible future scenarios and uncertainties.

Thus, the correct answer is Option (1) A-III, B-IV, C-I, D-II.

Information Booster:

Risk analysis is crucial for financial planning, investment decisions, and project evaluations. Various methods such as sensitivity analysis, scenario analysis, simulation analysis, and decision tree analysis help organizations anticipate potential risks and uncertainties.

• Sensitivity Analysis is useful when evaluating the effect of individual variable changes, such as interest rates or raw material costs, on the project's feasibility.
• Scenario Analysis allows for testing multiple external risks, such as economic downturns or market fluctuations.
• Simulation Analysis applies statistical techniques to generate thousands of possibilities, offering a probability-based risk assessment.
• Decision Tree Analysis provides a structured decision-making framework, where different outcomes and probabilities are mapped for better planning.

By applying these risk analysis methods, businesses improve strategic decision-making, minimize uncertainties, and optimize financial investments.

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