Sensitivity Analysis

Takes into account a number of possible outcomes/returns estimates while evaluating an asset/assessing risk. In order to have a sense of the variability among return estimate 5, a possible approach is to estimate the worst (pessimistic), the expected (most likely) and the nest (optimistic) return associated with the asset. Alternatively, the level of outcomes may be related to the state of the economy, namely, recession, normal and boom conditions. The difference between the optimistic and the pessimistic outcomes is the range which, according to the sensitive analysis, is the basic measure of risk. The greater the range, the more variability (risk) the asset is said to have.

The illustrate consider the facts in Table 3.1

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