CFA Level I · CFA Level I Exam · Introduction to Equity Valuation
An analyst's report presents a valuation based on assumptions that the analyst has not tested against alternative scenarios. Which action would most likely improve the reliability of the valuation conclusion?
Performing sensitivity analysis on key assumptions most improves reliability. It shows how intrinsic value responds to changes in inputs, exposing the uncertainty in the estimate, whereas relying on one optimistic forecast or simply adopting the market price adds bias or removes independent judgment.
- AUsing only the most optimistic forecast
- BPerforming sensitivity analysis on key assumptionsCorrect
- CReplacing the model with the market price
Explanation
Sensitivity analysis shows how the value changes as key inputs vary, revealing the range of plausible outcomes. Using only an optimistic forecast adds bias. Replacing the model with the market price removes the analyst's independent estimate of intrinsic value.
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