PHFO Quantitative Analysis For Business Pre-Assessment Practice Exam

Which statement best describes the purpose of a decision tree in decision analysis?

To compute variance of a statistic. To model decisions under uncertainty using probabilities and payoffs. To estimate sample size. To measure regression coefficients.

Correct Answer:

To model decisions under uncertainty using probabilities and payoffs.

Explanation:

Decision trees model decisions under uncertainty by mapping each choice to possible future events, attaching probabilities to uncertain outcomes and payoffs (or costs) to those outcomes. By working backward from the end, you calculate the expected value of each path and choose the option that yields the highest expected value. This approach directly combines likelihoods with consequences to guide optimal decisions under risk. The other tasks aren’t about choosing between options under uncertainty: variance is about dispersion in a statistic, estimating sample size is about planning how many observations are needed, and measuring regression coefficients is about quantifying relationships in a model.

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