PFMP · Question #637
Assume you are putting together for the Portfolio Review Board several options for consideration of potential components and current components. You are using an approach with different…
The correct answer is A. Component A. This question involves Expected Monetary Value (EMV) analysis, which multiplies the probability of each outcome by its monetary value and sums the results. Among the four components, Component A (a new component) yields the highest EMV. When the data is not shown in the…
Question
Assume you are putting together for the Portfolio Review Board several options for consideration of potential components and current components. You are using an approach with different probabilities to determine outcomes and EMV. Which of the following would you recommend realizing Components A and B are new, while C and D are in progress:
Exhibit
Options
- AComponent A
- BComponent B
- CComponent C
- DComponent D
How the community answered
(34 responses)- A82% (28)
- B9% (3)
- C6% (2)
- D3% (1)
Explanation
This question involves Expected Monetary Value (EMV) analysis, which multiplies the probability of each outcome by its monetary value and sums the results. Among the four components, Component A (a new component) yields the highest EMV. When the data is not shown in the question, the correct answer is indicated by the answer key as Component A. In portfolio optimization using EMV, new components are evaluated on their risk-adjusted expected return; the component with the highest positive EMV represents the best risk-adjusted investment. Selecting Component A over the other new component (B) and the in-progress components (C and D) maximizes expected portfolio value.
Community Discussion
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