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Sometimes, the stress test's designers fail to imagine plausible future scenarios, possibly because of professional peer pressure or groupthink within a profession or trade or because some things are just too horrible to imagine. For example, there was a failure by the great majority of financial experts to envisage the 2007–2008 financial ...
Scenario analysis can also be used to illuminate "wild cards." For example, analysis of the possibility of the earth being struck by a meteor suggests that whilst the probability is low, the damage inflicted is so high that the event is much more important (threatening) than the low probability (in any one year) alone would suggest.
Dynamic financial analysis (DFA) is method for assessing the risks of an insurance company using a holistic model as opposed to traditional actuarial analysis, which analyzes risks individually. Specifically, DFA reveals the dependencies of hazards and their impacts on the insurance company's financial well being as a whole such as business mix ...
Scenario planning, which was originally used in the military and recently used by large corporations to analyze future scenarios. Porter five forces analysis, which addresses industry attractiveness and rivalry through the bargaining power of buyers and suppliers and the threat of substitute products and new market entrants;
Monte Carlo methods are used in corporate finance and mathematical finance to value and analyze (complex) instruments, portfolios and investments by simulating the various sources of uncertainty affecting their value, and then determining the distribution of their value over the range of resultant outcomes.
In the short term, any of the various scenarios could occur. For example, if one knew a given investment had a 50% chance of earning a return of $10, a 25% chance of earning $20 and a 25% chance of earning $–10 (losing $10), the expected return would be $7.5:
Financial modeling is the task of building an abstract representation (a model) of a real world financial situation. [1] This is a mathematical model designed to represent (a simplified version of) the performance of a financial asset or portfolio of a business, project, or any other investment.
The definition of a worst-case scenario varies by the field to which it is being applied. For example, in environmental engineering", "[a] worst-case scenario is defined as the release of the largest quantity of a regulated substance from a single vessel or process line failure that results in the greatest distance to an endpoint". [5]