Define {with examples) what are (a) Simulation Analysis, (b) Sensitivity Analysis, and {c) Systematic risk.

Define {with examples) what are (a) Simulation Analysis, (b) Sensitivity Analysis, and {c) Systematic risk.

Expert Solution

1)Simulation analysis is the process of developing a model on computer in the form of mathematical representation, by using actual and proposed data.

An example of simulation at the bank. Simulation of a bank involves three processes.

a) Customer arrives

b) Customer served

c) Customer leaves

2) Sensitivity analysis is an analysis done to see the effect of an Independent variable on a set dependent variable under specific circumstances. For example, the effect of change in Yield to maturity on the price of the bond when the inflation is high and low. In this case yield to maturity is taken as the independent factor and price the dependent factor.

3) Systematic risk is the risk which is non diversifiable and affects the entire market and not just a particular industry. Example of systematic risk is economic and market related risk. These are change in interest rates , inflation , fluctuatiin in currency, recession and so on.

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