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 ... 
Financial Modeling
The process by which a firm constructs a financial representation ... 
Model Risk
A type of risk that occurs when a financial model used to measure ... 
Sensitivity
The magnitude of a financial instrument's reaction to changes ... 
Duration
A measure of the sensitivity of the price (the value of principal) ...

How do you calculate the geometric mean to assess portfolio performance?
The geometric mean is used to calculate the central tendency of a set of numbers. It is the average of the logarithmic values ... Read Full Answer >> 
What is the difference between a simple random sample and a stratified random sample?
Simple random samples and stratified random samples differ in how the sample is drawn from the overall population of data. ... Read Full Answer >> 
What are the advantages and disadvantages of using systematic sampling?
As a statistical sampling method, systematic sampling is simpler and more straightforward than random sampling. It can also ... Read Full Answer >> 
What is the difference between the standard error of means and standard deviation?
The standard deviation, or SD, measures the amount of variability or dispersion for a subject set of data from the mean, ... Read Full Answer >> 
What level of correlation among investments will guarantee market returns but have ...
The efficient frontier set forth by modern portfolio theory (MPT) can provide an estimate of an optimal portfolio that allows ... Read Full Answer >> 
What is a "non linear" exposure in Value at Risk (VaR)?
The value at risk (VaR) is a statistical risk management technique that determines the amount of financial risk associated ... 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 Quantitative Analysis?
Quantitative analysis refers to the use of mathematical computations to analyze markets and investments. 
Fundamental Analysis
Understanding the Simple Random Sample
A simple random sample is a subset of a statistical population in which each member of the subset has an equal probability of being chosen. 
Economics
What is Systematic Sampling?
Systematic sampling is similar to random sampling, but it uses a pattern for the selection of the sample. 
Fundamental Analysis
Explaining Expected Return
The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome. 
Fundamental Analysis
Explaining the Geometric Mean
The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.