NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Research
An analyst forecasts a firm's earnings using three scenarios: base case, optimistic case and pessimistic case, each with a different set of assumptions. What is this practice best described as?
Scenario analysis is correct because the analyst builds distinct sets of assumptions, such as base, optimistic and pessimistic cases, and examines the range of resulting earnings. Regression and benchmarking serve different purposes, estimating statistical relationships or comparing against peer companies respectively.
- AScenario analysisCorrect
- BRegression analysis
- CTime-series smoothing
- DPeer group benchmarking
Explanation
Building several coherent sets of assumptions (base, best, worst) to see the range of outcomes is scenario analysis. Regression estimates relationships between variables, and benchmarking compares with peers.
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