ACCA Financial Management (F9) Certification Practice Exam

Which of the following best describes expected values?

1. Values subject to historical fluctuations

2. Outcomes that are solely determinable

3. The average of all possible outcomes, weighted by their probabilities

4. The guaranteed returns within a portfolio

The correct answer is: The average of all possible outcomes, weighted by their probabilities

Expected values represent a statistical concept often used in finance and decision-making processes to evaluate potential outcomes. The correct choice highlights that expected values are determined by calculating the average of all possible outcomes, factoring in the probability of each outcome occurring. This means each potential outcome is multiplied by its likelihood of occurrence, and then all these products are summed to yield a single measure that reflects the central tendency of the variable in question. For example, if you had a project with several potential returns (like gaining $100, losing $50, or breaking even), you would assess the probability of each return and calculate the expected value to understand the average return you might anticipate if the project were to be repeated many times. The other options do not accurately convey the concept of expected values. While historical fluctuations may influence the calculation of probabilities, they do not describe expected values directly. Outcomes that are solely determinable do not reflect uncertainty and do not require a probabilistic approach. Lastly, guaranteed returns involve certainty and do not take potential variability into account, making them distinct from the weighted average concept that defines expected values.