sensitivity analysis

(noun)

the study of how the uncertainty in the output of a mathematical model or system can be apportioned to different sources of uncertainty in its inputs

Related Terms

  • parameter

Examples of sensitivity analysis in the following topics:

  • Sensitivity Analysis

    • Sensitivity analysis determines how much a change in an input will affect the output.
    • Sensitivity analysis is a statistical tool that determines how consequential deviations from the expected value occur.
    • Sensitivity analysis can be useful for a number of reasons, including:
    • The sensitivity analysis entails changing each variable and seeing how that changes the output .
    • Sensitivity analysis determines how much an output is expected to change due to changes in a variable or parameter.
  • Risks Involved in Capital Budgeting

    • One such way is to conduct a sensitivity analysis.
    • Sensitivity analysis is the study of how the uncertainty in the output of a model (numerical or otherwise) can be apportioned to different sources of uncertainty in the model input.
    • A related practice is uncertainty analysis which focuses rather on quantifying uncertainty in model output.
    • Ideally, uncertainty and sensitivity analysis should be run in tandem.
    • Another method is scenario analysis, which involves the process of analyzing possible future events by considering alternative possible outcomes.
  • The Interest Rate Risk

    • On the other hand, the fixed-rate assets and liabilities are not sensitive to interest rate changes.
    • If the interest-rate sensitive liabilities exceed the interest-rate sensitive assets, then rising interest rates cause banks' profits to plummet, while falling interest rates cause banks' profits to increase.
    • If the interest-rate sensitive liabilities equal the interest-rate sensitive assets, then fluctuating interest rates do not affect bank profits.
    • For example, if the bank manager knows the interest-rate sensitive liabilities exceed the interest-rate sensitive assets, and he believes interest rates will fall, then he will do nothing.
    • If a bank manager thinks interest rates will increase, subsequently, he would boost interest-rate sensitive assets and decrease interest-rate sensitive liabilities by manipulating balance sheet items.
  • Trend Analysis

    • In addition to using financial ratio analysis to compare one company with others in its peer group, ratio analysis is often used to compare the company's performance on certain measures over time.
    • Trend analysis can be performed in different ways in finance.
    • Fundamental analysis, on the other hand, relies not on sentiment measures (like technical analysis) but on financial statement analysis, often in the form of ratio analysis.
    • Creditors and company managers also use ratio analysis as a form of trend analysis.
    • Analyze the benefits and challenges of using trend analysis to evaluate a company
  • Valuing Nonconstant Growth Dividends

    • Note that the models diverge for and hence are extremely sensitive to the difference of dividend growth to discount factor.
    • Naturally, any differences in IGAR between stocks in the same industry may be due to differences in fundamentals, and would require further specific analysis.
  • Valuing the Corporation

    • CAPM Model ke = Rf + B ( Rm-Rf) + SCRP + CSRP Where: Rf = Risk free rate of return (Generally taken as 10-year Government Bond Yield) B = Beta Value (Sensitivity of the stock returns to market returns) Ke = Cost of Equity Rm= Market Rate of Return SCRP = Small Company Risk Premium, CSRP= Company specific Risk premium
    • The value of asset-based analysis of a business is equal to the sum of its parts.
  • Balance Sheet Analysis

    • Balance sheet analysis is process of understanding the risk and profitability of a firm through analysis of reported financial information.
    • Balance sheet analysis consists of 1) reformulating reported Balance sheet, 2) analysis and adjustments of measurement errors, and 3) financial ratio analysis on the basis of reformulated and adjusted Balance sheet.
    • Two types of ratio analysis are performed: 3.1) Analysis of risk and 3.2) analysis of profitability:
    • Risk analysis consists of liquidity and solvency analysis.
    • Cash flow analysis is also useful.
  • Using Financial Statements to Understand a Business

    • Two types of ratio analysis are analysis of risk and analysis of profitability:
    • Risk Analysis: Analysis of risk detects any underlying credit risks to the firm.
    • Risk analysis consists of liquidity and solvency analysis.
    • Profitability analysis: Analyses of profitability refer to the analysis of return on capital.
    • Explain how a company would use the financial statements to perform risk analysis and profitability analysis
  • Interpreting Ratios and Other Sources of Company Information

    • Financial statement analysis, also known as financial analysis, is the process of understanding the risk and profitability of a company through the analysis of that company's reported financial information.
    • There are four methods for making these types of comparisons: vertical analysis, horizontal analysis, ratios, and trend percentages.
    • In a vertical analysis, each item is expressed as a percentage of a significant total.
    • This type of analysis is especially helpful in analyzing income statement data .
    • In vertical analysis each item is expressed as a percentage of a significant total.
  • Scenario Analysis

    • Scenario analysis is a process of analyzing decisions by considering alternative possible outcomes.
    • Scenario analysis is a strategic process of analyzing decisions by considering alternative possible outcomes (sometimes called "alternative worlds").
    • For example, a firm might use scenario analysis to determine the net present value (NPV) of a potential investment under high and low inflation scenarios.
    • The purpose of scenario analysis is not to identify the exact conditions of each scenario; it just needs to approximate them to provide a plausible idea of what might happen.
    • This scenario analysis shows how changes in factors like yield and transport cost can affect profits.
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