ACCA Performance Management (F5) Certification Practice Exam

What is meant by risk in the context of decision making?

1. Known outcomes with unknown probabilities

2. Number of possible outcomes with the probability of outcomes that is known

3. Certain outcomes with guaranteed results

4. Outcomes that cannot be quantified

The correct answer is: Number of possible outcomes with the probability of outcomes that is known

In the context of decision-making, risk refers to situations where there are multiple possible outcomes, and for those outcomes, the probabilities are known. This provides a framework for anticipating various scenarios and their likelihoods, allowing decision-makers to assess potential impacts and make informed decisions based on quantifiable data. The option emphasizing the number of possible outcomes with known probabilities captures the essence of risk because it reflects the structured approach that can be employed in rational decision-making. By understanding the range of possible outcomes and the associated probabilities, individuals can evaluate the risks and rewards of different choices, ultimately leading to more effective strategies. The other choices present concepts that do not accurately represent the idea of risk in decision-making. Known outcomes with unknown probabilities do not present a complete picture as it leaves uncertainty regarding outcomes, which doesn't align with the concept of quantifiable risk. Certain outcomes with guaranteed results eliminate risk entirely, as there is no variability to consider, while outcomes that cannot be quantified typically fall outside the realm of risk assessment, as they cannot be measured or evaluated in terms of probability. Thus, they do not facilitate decision-making in an informed manner.