DEFINITION of 'Scenario Analysis'
The process of estimating the expected value of a portfolio after a given period of time, assuming specific changes in the values of the portfolio's securities or key factors that would affect security values, such as changes in the interest rate.
Scenario analysis commonly focuses on estimating what a portfolio's value would decrease to if an unfavorable event, or the "worstcase scenario", were realized. Scenario analysis involves computing different reinvestment rates for expected returns that are reinvested during the investment horizon.
INVESTOPEDIA EXPLAINS 'Scenario Analysis'
There are many different ways to approach scenario analysis, but a common method is to determine what the standard deviation of daily or monthly security returns are, and then compute what value would be expected for the portfolio if each security generated returns two or three standard deviations above and below the average return.
In this way, an analyst can have reasonable certainty that the value of a portfolio is unlikely to fall below (or rise above) a specific value during a given time period.

BackOfTheEnvelope Calculation
An informal mathematical computation, often performed on a scrap ... 
Decision Analysis  DA
A systematic, quantitative and visual approach to addressing ... 
Bank Stress Test
An analysis conducted under unfavorable economic scenarios which ... 
Growth Curve
A graphical representation of how a particular quantity increases ... 
Bank Examination
An evaluation of the safety and soundness of a bank. The primary ... 
Value At Risk  VaR
A statistical technique used to measure and quantify the level ...

How is portfolio variance reduced in Modern Portfolio Theory?
According to modern portfolio theory, or MPT, portfolio variance can be reduced by diversifying a portfolio through the inclusion ... Read Full Answer >> 
How do I use the rule of 72 to estimate compounding periods?
The rule of 72 is best used to estimate compounding periods that are factors of two (2, 4, 12, 200 and so on). This is because ... Read Full Answer >> 
What are the advantages of portfolio planning with the efficient frontier?
The advantages of portfolio planning with the efficient frontier are based in Harry Markowitz's modern portfolio theory (MPT), ... Read Full Answer >> 
Which is better: dollar cost averaging or value averaging?
Historical comparisons seem to indicate that value averaging (VA) tends to outperform dollar cost averaging (DCA), offering ... Read Full Answer >> 
What does the information ratio tell about the design of a mutual fund?
The information ratio can tell an investor how well a mutual fund is designed to deliver excess or abnormal returns as well ... Read Full Answer >> 
How can I use Bollinger Bands® to spot options trading opportunities?
Traders can use Bollinger Bands in a couple of different types of trading strategies. The most common strategy is using Bollinger ... Read Full Answer >>

Active Trading Fundamentals
Using Logic To Examine Risk
Know your odds before you put your money on the table. 
Mutual Funds & ETFs
Understanding Volatility Measurements
How do you choose a fund with an optimal riskreward combination? We teach you about standard deviation, beta and more! 
Options & Futures
Multivariate Models: The Monte Carlo Analysis
This decisionmaking tool integrates the idea that every decision has an impact on overall risk. 
Fundamental Analysis
Monte Carlo Simulation With GBM
Learn to predict future events through a series of random trials. 
Fundamental Analysis
Scenario Analysis Provides Glimpse Of Portfolio Potential
This statistical method estimates how far a stock might fall in a worstcase scenario. 
Fundamental Analysis
Understanding the Profitability Index
The profitability index (PI) is a modification of the net present value method of assessing an investment’s attractiveness. 
Economics
What is Neoliberalism?
Neoliberalism is a littleused term to describe an economy where the government has few, if any, controls on economic factors. 
Fundamental Analysis
Explaining the Monte Carlo Simulation
Monte Carlo simulation is an analysis done by running a number of different variables through a model in order to determine the different outcomes. 
Fundamental Analysis
Understanding Modern Portfolio Theory
Modern portfolio theory describes ways of diversifying assets in a portfolio in order to maximize the expected return given the owner’s risk tolerance. 
Investing Basics
Explaining Idiosyncratic Risk
Idiosyncratic risk is the risk inherent in a particular investment due to the unique characteristics of that investment.