Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects. b. Well-diversified stockholders do not need to consider market risk when determining required rates of return. c. 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. d. Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions. e. Market risk is important, but it does not have a direct effect on stock prices because it only affects beta.

The correct answer is c. 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.

Explanation:

Financial sensitivity analysis is a term, used in companies to make investment decisions, which consists in calculating new cash flows and NPV (in a project, in a business, etc.), when changing a variable (the initial investment, duration, income, income growth rate, costs, etc.) In this way, having the new cash flows and the new NPV we can calculate and improve our estimates on the project that we are going to start in the case that these variables changed or there were errors of appreciation on our part in the initial data.