ACCAspace
Provided by
ACCA Research Institute
ACCA P4
Advanced Financial Management (AFM)
高级财务管理
ACCA Lecturer: Lily Wang
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com
, P4 Chapter 14 Content
1 Incorporating risk into investment appraisal
2 Value at risk
3 Introduction to hedging methods
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com 2
, 1.Incorporating risk into investment appraisal
Overview of methods
The input variables in an investment appraisal are all estimates of likely
future outcomes. There are several methods of incorporating risk into an
investment appraisal:
• Expected values (probability analysis)
• Use of the CAPM model to derive a discount rate
• sensitivity analysis, and simulation
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com 3
, 1.Incorporating risk into investment appraisal
Probability analysis
If the outcome from an investment is uncertain, but the probability
associated with each of the possible outcomes is known, and expected
value calculation can be used
The expected value is calculated as the sum of ( each outcome
multiplied by its associated probability)
For example, if sales are expected to be either $1,000,000or $1,500,000
with probabilities of 35% and 65%, the expected asales can be
calculated as:
The main problem with the expected value calculation is that the value
might not correspond to any of the possible outocmes, so although the
calculation fives a useful long-run average figure, it is not useful for one-
off calculations
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com 4
Provided by
ACCA Research Institute
ACCA P4
Advanced Financial Management (AFM)
高级财务管理
ACCA Lecturer: Lily Wang
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com
, P4 Chapter 14 Content
1 Incorporating risk into investment appraisal
2 Value at risk
3 Introduction to hedging methods
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com 2
, 1.Incorporating risk into investment appraisal
Overview of methods
The input variables in an investment appraisal are all estimates of likely
future outcomes. There are several methods of incorporating risk into an
investment appraisal:
• Expected values (probability analysis)
• Use of the CAPM model to derive a discount rate
• sensitivity analysis, and simulation
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com 3
, 1.Incorporating risk into investment appraisal
Probability analysis
If the outcome from an investment is uncertain, but the probability
associated with each of the possible outcomes is known, and expected
value calculation can be used
The expected value is calculated as the sum of ( each outcome
multiplied by its associated probability)
For example, if sales are expected to be either $1,000,000or $1,500,000
with probabilities of 35% and 65%, the expected asales can be
calculated as:
The main problem with the expected value calculation is that the value
might not correspond to any of the possible outocmes, so although the
calculation fives a useful long-run average figure, it is not useful for one-
off calculations
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com 4
