Which of the following statements is CORRECT?
A. 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.
B. Well-diversified stockholders do not need to consider market risk when determining required rates of return.
C. Market risk is important, but it does not have a direct effect on stock prices because it only affects beta.
D. Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions.
E. Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects.
Answer: D
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