Compare and contrast the methods of sensitivity analysis and certainity equivalent briefly.

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To understand scenario analysis vs sensitivity analysis, one should first understand that investment decisions are based on a set of assumptions and inputs. The lack of uncertainty in the premises and inputs brings about investment risk. Before making an investment, an individual assesses the magnitude of such risks and weighs it against potential benefits.

Scenario analysis is the process of predicting the future value of an investment depending on changes that may occur to existing variables. It requires one to explore the impact of different market conditions on the project or investment as a whole.

In contrast sensitivity analysis is the study of how the outcome of a decision changes due to variations in input. It is used in situations that rely on one or more input variables. For eg: bond prices can be affected by changes in inflation, interest rates and credit ratings.

Investors use both techniques to determine the best possible investments.

jeff jeffy answered 1 year ago

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Compare and contrast the methods of sensitivity analysis and certainity equivalent briefly.

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