Scenario Analysis is a process through which the estimation of the expected value of a project or item over a period of time-based on the assumption that changes of the value of the project or item take place (Hassani, 2016). For example, the change in the interest rates is an example of a sift that is expected during the estimation of the value. Scenario Analysis is used to compute the reinvestment rate and the rate of returns. On the other hand, it is essential in determining the number of risks that might be present in the investment plan.
Considering the mathematical and statistical principles, the scenario analysis is essential in the estimation of the shifts in the value of portfolios. The import can be applied in the procedure of inspection of the number of risks located within the given asset. Scenario analysis is critical in the analysis and investment strategy. A financial decision can be determined using the scenario analysis. The measure of dispersion like standard deviations is used to estimate the financial shifts in the markets hence determine how to invest in the finances.
Hassani, B. K. (2016). Scenario Analysis in Risk Management: Theory and Practice in Finance. Cham: Springer International Publishing : Imprint: Springer.