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.
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.

Functional Decomposition
A method of business analysis that dissects a complex business ... 
Decision Tree
A schematic treeshaped diagram used to determine a course of ... 
Expected Return
The amount one would anticipate receiving on an investment that ... 
Option
A financial derivative that represents a contract sold by one ... 
Financial Modeling
The process by which a firm constructs a financial representation ... 
Binomial Option Pricing Model
An options valuation method developed by Cox, et al, in 1979. ...

Options & Futures
Reducing Risk With Options
If you want to use leverage to your advantage, you must know how many contracts to buy. 
Investing Basics
Pin Down Stock Price With Real Options
How can you assign a value to what a company may do with its business in the future? We explain how it works. 
Fundamental Analysis
Find The Right Fit With Probability Distributions
Discover a few of the most popular probability distributions and how to calculate them. 
Options & Futures
The "True" Cost Of Stock Options
Perhaps the real cost of employee stock options is already accounted for in the expense of buyback programs. 
Active Trading Fundamentals
Bet Smarter With The Monte Carlo Simulation
This technique can reduce uncertainty in estimating future outcomes. 
Economics
Understanding Perpetuity
Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date. 
Fundamental Analysis
What is a Null Hypothesis?
In statistics, a null hypothesis is assumed true until proven otherwise. 
Investing
How to Use Stratified Random Sampling
Stratified random sampling is a technique best used with a sample population easily broken into distinct subgroups. Samples are then taken from each subgroup based on the ratio of the subgroup’s ... 
Economics
How A Limited Government Affects A Country's Finances
Countries with limited governments have fewer laws about what individuals and businesses can and can’t do. What's the net result? 
Fundamental Analysis
Lognormal and Normal Distribution
When and why do you use lognormal distribution or normal distribution for analyzing securities? Lognormal for stocks, normal for portfolio returns.