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. Shadowing

    The process of creating values for variables that don't rely ...
  2. Variable Cost Ratio

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

    The extent to which data points in a statistical distribution ...
  4. Multicollinearity

    In statistics, the occurrence of several independent variables ...
  5. Variable Cost

    A corporate expense that varies with production output. Variable ...
  6. Correlation Coefficient

    A measure that determines the degree to which two variable's ...
Related Articles
  1. 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).
  2. Economics

    Understanding Regression

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

    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.
  4. Fundamental Analysis

    Scenario Analysis Provides Glimpse Of Portfolio Potential

    This statistical method estimates how far a stock might fall in a worst-case scenario.
  5. 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.
  6. Financial Advisors

    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.
  7. Investing Basics

    Regression Basics For Business Analysis

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

    Are You Buying Annuities Or Mutual Funds?

    Investing a client's money in variable annuties is becoming a target for criticism.
  9. Fundamental Analysis

    Explaining Linear Relationships

    A linear relationship describes the proportionality between an independent variable and a dependent variable.
  10. Active Trading Fundamentals

    Bet Smarter With The Monte Carlo Simulation

    This technique can reduce uncertainty in estimating future outcomes.
RELATED FAQS
  1. What variables are most important when making a prediction through sensitivity analysis?

    Explore sensitivity analysis and how this method considers different variables to determine a course of action based on statistical ... 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. How are variable annuities regulated?

    Discover the various rules that the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority ... Read Answer >>
  4. Do production costs include all fixed and variable costs?

    Learn more about fixed and variable costs and how they affect production costs. Understanding how to graph these costs can ... Read Answer >>
  5. 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 >>
  6. When does positive correlation prove causation?

    When is correlation causation? Never. Use correlation wisely, the way a true statistician would. Don't get fooled by fancy ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center