Scenario analysis is a method of assessing probable future occurrences by taking into account alternate probable consequences or scenarios. Scenario analysis was planned to enable quality decision making by appropriating more comprehensive conditions of results and what they entail.
For instance, in finance and economics, a commercial enterprise may try to predict various probable outcomes regarding economy (for example slow development, moderate development, and rapid development).It may also try to predict financial market yields for stocks, bonds, and cash, in different scenarios.
Scenario analysis takes into account sub-sets of every type of probability. In addition, it may also search to ascertain correlations and allocate possibilities to scenarios, as well as subsets. Scenario analysis will look at the distribution of assets among different categories of assets, which is termed asset allocation.
The firm may also compute the scenario-weighted expected return (this number will refer to the absolute quality of financial conditions). Counting on the complicated nature of financial conditions, scenario analysis is regarded as a popular practice.
It is not easy to anticipate what is in the future, for the real future scenario can be totally unanticipated. This proves to be true for the prediction of outcomes and allocation of chances to those outcomes, and common predictions that do not pay any heed to financial market yields.
The scenarios may be patterned with the help of statistical or mathematical formulae. For example, taking into consideration the probable variation in separate outcomes and probable associations among outcomes.
Financial entities are able to take the scenario analysis forward by associating the asset apportionment, which the above mentioned computations propose to the peer group, or commercial enterprise asset distribution. The financial enterprise looks to regulate its business risk ,and not the portfolio risk of the customer.
In geo-politics or common politics, scenario analysis includes patterning the probable optional ways of political or social ambience and potential war, and diplomatic risks.
Scenario analysis has much significance in a number of sectors.
Last Updated on : 27th June 2013