Sensitivity Analysis

Loading the player...

What is a 'Sensitivity Analysis'

A sensitivity analysis is 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).

BREAKING DOWN '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. Variable Cost Ratio

    Variable costs expressed as a percentage of sales. The variable ...
  2. Variability

    The extent to which data points in a statistical distribution ...
  3. Correlation Coefficient

    A measure that determines the degree to which two variable's ...
  4. Variable Cost

    A corporate expense that varies with production output. Variable ...
  5. Variable Interest Rate

    An interest rate on a loan or security that fluctuates over time, ...
  6. Endogenous Variable

    A classification of a variable generated by a statistical model ...
Related Articles
  1. Markets

    Understanding Regression

    Regression is a statistical analysis that attempts to predict the effect of one or more variables on another variable.
  2. Markets

    Stock and Flow Variables Explained: A Closer Look at Apple

    The difference between stock and flow variables is an essential concept in finance and economics. We illustrate with financial statements from Apple Inc.
  3. Retirement

    Variable Annuity Basics

    Find out how variable annuities can help you plan for retirement by offering the returns of the stock market with the guarantee of insurance.
  4. Financial Advisor

    Variable Annuities: The Pros and Cons

    Variable annuities are one of the most complicated financial instruments. Here is an in depth look at their pros and cons.
  5. Investing

    Regression Basics For Business Analysis

    This tool is easy to use and can provide valuable information on financial analysis and forecasting. Find out how.
  6. Markets

    Explaining Linear Relationships

    A linear relationship describes the proportionality between an independent variable and a dependent variable.
  7. Retirement

    Variable Vs. Variable Universal Life Insurance

    Do you know why you might need one policy versus the other? Read on to find out.
  8. Investing

    Contribution Margin

    Contribution margin is a cost accounting concept that allows a company to determine the profitability of individual products.
  9. Markets

    Explaining Growth Rates

    Growth rate refers to the amount a specific variable or measure has grown over a specified time, whether related to one company or an entire economy.
  10. Retirement

    Variable Annuities: A Good Retirement Investment?

    Variable annuities provide lifetime payments and tax-deferred growth, but – given their hefty fees – are they right for you?
RELATED FAQS
  1. How is the ability to perform Activities of Daily Living (ADL) measured?

    Find out how to apply sensitivity analysis to your investment decisions, why sensitivity analysis might be useful and what ... Read Answer >>
  2. What are the variables in variable costs?

    Learn about variable costs. Explore how and why these costs may fluctuate, as well as ways in which they may differ from ... Read Answer >>
  3. What is the difference between direct costs and variable costs?

    Learn about variable costs and direct costs, how direct costs and variable costs are classified and the differences between ... Read Answer >>
  4. How are variable annuities regulated?

    Discover the various rules that the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority ... Read Answer >>
  5. What are some examples of ways that sensitivity analysis can be used?

    Understand the concept of sensitivity analysis and learn about the wide variety of disciplines to which it can be applied. Read Answer >>
  6. Are variable annuities a good retirement investment?

    Discover the basics of variable annuities, the positive and negative aspects associated with them, and who is best suited ... Read Answer >>
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center