Sensitivity Analysis

AAA

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 price-to-earnings multiple (another independent variable) at that time. The analyst can create a table of predicted price-to-earnings multiples and a corresponding value of the company's equity based on different values for each of the independent variables.

RELATED TERMS
  1. Zero-Gap Condition

    When a financial institution's interest rate-sensitive assets ...
  2. Capital Budgeting

    The process in which a business determines whether projects such ...
  3. Common Stock

    A security that represents ownership in a corporation. Holders ...
  4. Bond

    A debt investment in which an investor loans money to an entity ...
  5. Duration

    A measure of the sensitivity of the price (the value of principal) ...
  6. Sensitivity

    The magnitude of a financial instrument's reaction to changes ...
Related Articles
  1. Find The Right Fit With Probability ...
    Fundamental Analysis

    Find The Right Fit With Probability ...

  2. 6 Terms To Warm The Coldest Wall Street ...
    Investing Basics

    6 Terms To Warm The Coldest Wall Street ...

  3. Bet Smarter With The Monte Carlo Simulation
    Active Trading Fundamentals

    Bet Smarter With The Monte Carlo Simulation

  4. Do-It-Yourself Analyst Predictions
    Fundamental Analysis

    Do-It-Yourself Analyst Predictions

comments powered by Disqus
Hot Definitions
  1. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  2. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  3. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  4. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  5. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  6. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
Trading Center