Scenario Analysis

Dictionary Says

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 "worst-case scenario", were realized. Scenario analysis involves computing different reinvestment rates for expected returns that are reinvested during the investment horizon.

Investopedia Says

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.

comments powered by Disqus
Hot Definitions
  1. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  2. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  3. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  4. Momentum Investing

    An investment strategy that aims to capitalize on the continuance of existing trends in the market. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values.
  5. Momentum Investing

    An investment strategy that aims to capitalize on the continuance of existing trends in the market. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values.
  6. IPO ETF

    An exchange-traded fund that focuses on stocks that have recently held an initial public offering (IPO). The underlying indexes tracked by IPO ETFs vary from one fund manager to another, but index IPO ETFs are usually passively managed and contain equities that have recently been offered to the public.
Trading Center