Definition
Scenario analysis evaluates how a valuation or investment performs under different plausible future states (base, bull, bear cases). Unlike sensitivity analysis which varies individual inputs, scenario analysis changes multiple assumptions simultaneously to model coherent alternative futures. Expected value can be calculated as the probability-weighted average of scenarios.
functions Formula
Expected Value = Σ(Probability_i × Value_i)
lightbulb Example
Bear case (25% probability): $30/share. Base case (50%): $50/share. Bull case (25%): $75/share. Expected value = 0.25×$30 + 0.50×$50 + 0.25×$75 = $51.25/share.
verified_user Key Points
- Models coherent alternative futures
- Assigns probabilities to each scenario
- Expected value = probability-weighted average
- More realistic than varying inputs independently