ACCA Performance Management (F5) Certification Practice Exam

How is Expected Value (EV) defined?

1. It is the highest possible outcome in a situation

2. It is the average of all outcomes without probabilities

3. It is a weighted average of all possible outcomes

4. It is the sum of all probabilities involved

The correct answer is: It is a weighted average of all possible outcomes

The concept of Expected Value (EV) is primarily defined as a weighted average of all possible outcomes in a given scenario, where each outcome is multiplied by its respective probability of occurrence. This method accounts for the uncertainty inherent in various outcomes, allowing for more informed decision-making. In contexts such as decision analysis and risk assessment, the calculation of EV provides a quantifiable measure of the potential value associated with different choices. By weighting the outcomes, it effectively balances the likelihood of each event against its impact, which is essential in scenarios where outcomes can vary significantly. Calculating the EV involves taking each potential outcome, determining the probability that it will occur, and then multiplying these two values. The results are summed to arrive at the EV of that scenario. This comprehensive approach gives a clearer picture of what can be expected in terms of results, especially when dealing with decisions that involve varying levels of risk and uncertainty. In comparison to the other definitions, the highest possible outcome does not consider probabilities or multiple scenarios, the average of all outcomes without probabilities ignores the significance of each outcome's likelihood, and the sum of all probabilities lacks the essential aspect of linking each probability with its corresponding outcome. Thus, defining EV as a weighted average of all possible outcomes is the most accurate representation