DEFINITION of 'Sensitivity Analysis'
A technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions. This technique is used within specific boundaries that will depend on one or more input variables, such as the effect that changes in interest rates will have on a bond's price.
Sensitivity analysis is a way to predict the outcome of a decision if a situation turns out to be different compared to the key prediction(s).
INVESTOPEDIA EXPLAINS 'Sensitivity Analysis'
Sensitivity analysis is very useful when attempting to determine the impact the actual outcome of a particular variable will have if it differs from what was previously assumed. By creating a given set of scenarios, the analyst can determine how changes in one variable(s) will impact the target variable.
For example, an analyst might create a financial model that will value a company's equity (the dependent variable) given the amount of earnings per share (an independent variable) the company reports at the end of the year and the company's pricetoearnings multiple (another independent variable) at that time. The analyst can create a table of predicted pricetoearnings multiples and a corresponding value of the company's equity based on different values for each of the independent variables.
VIDEO

Bond
A debt investment in which an investor loans money to an entity ... 
ZeroGap Condition
When a financial institution's interest ratesensitive assets ... 
Sensitivity
The magnitude of a financial instrument's reaction to changes ... 
Common Stock
A security that represents ownership in a corporation. Holders ... 
Duration
A measure of the sensitivity of the price (the value of principal) ... 
Capital Budgeting
The process in which a business determines whether projects such ...

What are some examples of ways that sensitivity analysis can be used?
Sensitivity analysis is an analysis method that is used to identify how much variations in the input values for a given variable ... Read Full Answer >> 
How is the ability to perform Activities of Daily Living (ADL) measured?
Use sensitivity analysis to estimate the effects of different variables on investment returns. This form of analysis is designed ... Read Full Answer >> 
What variables are most important when making a prediction through sensitivity analysis?
Sensitivity analysis is used in corporate finance and other fields as a means of making predictions based on changes in variables. ... Read Full Answer >> 
What is a "linear" exposure in Value at Risk (VaR) calculation?
A linear exposure in the valueatrisk, or VaR, calculation is represented by positions in stocks, bonds, commodities or ... Read Full Answer >> 
What is the criteria for a simple random sample?
Simple random sampling is the most basic form of sampling and can be a component of more precise, more complex sampling methods. ... Read Full Answer >> 
How is the 8020 rule (Pareto's Principle) used in macroeconomics?
The 8020 rule was first used in macroeconomics to describe the distribution of wealth in Italy in the early 20th century, ... Read Full Answer >>

Investing
What's a Sensitivity Analysis?
Sensitivity analysis is used in financial modeling to determine how one variable (the target variable) may be affected by changes in another variable (the input variable). 
Fundamental Analysis
Find The Right Fit With Probability Distributions
Discover a few of the most popular probability distributions and how to calculate them. 
Investing Basics
6 Terms To Warm The Coldest Wall Street Heart
There is plenty of love on Wall Street, even if it's all just words. 
Active Trading Fundamentals
Bet Smarter With The Monte Carlo Simulation
This technique can reduce uncertainty in estimating future outcomes. 
Fundamental Analysis
DoItYourself Analyst Predictions
Regular investors can build their own financial models using the mosaic theory. 
Fundamental Analysis
What is a Representative Sample?
In statistics, a representative sample accurately represents the makeup of various subgroups in an entire data pool. 
Fundamental Analysis
How to Calculate a Turnover Ratio
A turnover ratio measures a mutual fund’s level of trading activity in a given time period, usually a year. 
Investing
The Strong Dollar’s (Real) Toll On Tech Stocks
A large portion of U.S. technology companies’ sales occur overseas, given the strong international business and consumer demand from many U.S. tech firms. 
Fundamental Analysis
How to Calculate a Coverage Ratio
In broad terms, the higher the coverage ratio, the better the ability of the enterprise to fulfill its obligations to its lenders. 
Fundamental Analysis
Calculating the HerfindahlHirschman Index (HHI)
The HerfindhalHirschman Index, (HHI) is a measure of market concentration and competition among market participants.