CFA Level I · CFA Level I Exam · Introduction to Financial Statement Modeling
After building a base-case model, an analyst changes one input at a time, such as revenue growth and gross margin, to see the effect on forecast earnings per share. This analysis is best described as:
This is sensitivity analysis, because each input is changed individually while the others are held constant to see how forecast earnings per share responds. Scenario analysis would change several inputs together to represent a defined situation, which is not what the analyst is doing.
- ASensitivity analysisCorrect
- BScenario analysis based on joint changes in several inputs
- CA bottom-up forecast of revenue
Explanation
Varying one input at a time to see the effect on output is sensitivity analysis. Scenario analysis changes several inputs together to represent a coherent state, such as a recession.
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