Tree Diagram

AAA

DEFINITION of 'Tree Diagram'

A diagram used in strategic decision making, valuation or probability calculations. The diagram starts at a single node, with branches emanating to additional nodes, which represent mutually exclusive decisions or events. In the diagram below, the analysis will begin at the first blank node. A decision or event will then lead to node A or B. From these secondary nodes, additional decisions or events will occur leading to the third level of nodes, until a final conclusion is reached.

Tree Diagram

INVESTOPEDIA EXPLAINS 'Tree Diagram'

Using the diagram is simple once you assign the appropriate values to each node. Chance nodes, representing a possible outcome, must be assigned a probability. Decision nodes ask a question and must be followed by answer nodes, such as "yes" or "no". Often, a value will be associated with a node, such as a cost or a payout. Tree diagrams combine the probabilities, decisions, costs and payouts of a decision and provide a strategic answer.

RELATED TERMS
  1. Functional Decomposition

    A method of business analysis that dissects a complex business ...
  2. Decision Tree

    A schematic tree-shaped diagram used to determine a course of ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that ...
  4. Binomial Option Pricing Model

    An options valuation method developed by Cox, et al, in 1979. ...
  5. Option

    A financial derivative that represents a contract sold by one ...
  6. Financial Modeling

    The process by which a firm constructs a financial representation ...
Related Articles
  1.  if used properly, options can have less risk than an equivalent position in a stock
    Options & Futures

    Reducing Risk With Options

  2. Investing Basics

    Pin Down Stock Price With Real Options

  3. Fundamental Analysis

    Find The Right Fit With Probability ...

  4. Options & Futures

    The "True" Cost Of Stock Options

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
Trading Center