Sensitivity Analysis

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).

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.

Investment dictionary. . 2012.

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• Sensitivity analysis — (SA) is the study of how the variation (uncertainty) in the output of a mathematical model can be apportioned, qualitatively or quantitatively, to different sources of variation in the input of a model Saltelli, A., Ratto, M., Andres, T.,… …   Wikipedia

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• sensitivity analysis — A form of analysis used in approaches to business problems, in which possible changes to the variables are subjected to the decision making technique to examine the range of possible outcomes and to determine the sensitivity of the projected… …   Accounting dictionary

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• sensitivity analysis — /ˌsensə tɪvəti əˌnæləsɪs/ noun the analysis of the effect of a small change in a certain calculation on the final result …   Dictionary of banking and finance

• sensitivity analysis — presentation of possible results and ways to create the result in a process which involves uncertain factors by assigning different values for these factors …   English contemporary dictionary

• analysis — a‧nal‧y‧sis [əˈnælss] noun analyses PLURALFORM [ siːz] [countable, uncountable] 1. a careful examination of something in order to understand it better: • The researchers carried out a detailed analysis of recent trends in share prices. •… …   Financial and business terms

• sensitivity test — sensitivity test, sensitivity analysis A single variant test to see how dependent a forecast, projection or stress test outcome is upon a single, selected variable or assumption. For example, a bank AL manager might perform a sensitivity analysis …   Financial and business terms