Sensitivity Analysis
Sensitivity analysis shows how different values of an independent variable affect a dependent variable under a given set of assumptions. Companies use sensitivity analysis to identify opportunities, mitigate risk, and communicate decisions to upper management.
Sensitivity analysis is deployed in business and economics by financial analysts and economists and is also known as a "what-if" analysis.
Definition: Sensitivity analysis shows how the values of different independent variables affect a dependent variable under specific assumptions. Companies use sensitivity analysis to identify opportunities, mitigate risks, and communicate decisions to senior management. Sensitivity analysis is used by financial analysts and economists in business and economic fields, also known as 'what-if analysis.'
Origin: The concept of sensitivity analysis dates back to the mid-20th century. With the development of computer technology, sensitivity analysis has become an important tool in finance and economics. Initially, it was mainly used in engineering and scientific fields, and later introduced into financial and economic analysis to help decision-makers better understand the relationships between variables.
Categories and Characteristics: Sensitivity analysis can be divided into single-variable sensitivity analysis and multi-variable sensitivity analysis.
- Single-variable sensitivity analysis: Only one independent variable is changed to observe its effect on the dependent variable. This method is simple and intuitive, suitable for preliminary analysis.
- Multi-variable sensitivity analysis: Multiple independent variables are changed simultaneously to observe their combined effect on the dependent variable. This method is more complex but provides more comprehensive analysis results.
- Helps identify key variables and their impact on outcomes.
- Provides decision support, helping management make more informed decisions.
- Mitigates risk by simulating different scenarios to identify potential risks.
Specific Cases:
- Case 1: A manufacturing company uses sensitivity analysis to evaluate the impact of raw material price fluctuations on production costs. By changing the prices of raw materials and analyzing their impact on total production costs, the company can better formulate procurement strategies and reduce cost risks.
- Case 2: An investment company uses sensitivity analysis to evaluate the performance of its investment portfolio under different market conditions. By changing variables such as market growth rates and interest rates, and analyzing their impact on investment returns, the company can optimize its investment portfolio and enhance returns.
Common Questions:
- Question 1: Are the results of sensitivity analysis reliable?
Answer: The results of sensitivity analysis depend on the accuracy of the input data and the reasonableness of the assumptions. If the input data is inaccurate or the assumptions are unreasonable, the analysis results may deviate from the actual situation. - Question 2: How to choose variables for sensitivity analysis?
Answer: When choosing variables, consider their potential impact on the dependent variable. Typically, key variables that have a significant impact on the outcome are selected.
