NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Research
Which of the following best describes the main purpose of a sensitivity analysis in a research analyst's valuation model?
Sensitivity analysis shows how the estimated value changes when a single key input, such as growth rate or discount rate, is varied while others are held constant. It helps the analyst see which assumptions the valuation depends on most.
- ATo see how the estimated value changes when one key input is variedCorrect
- BTo confirm that the company's audited accounts are free from fraud
- CTo assign a probability to each possible economic outcome
- DTo compare the company's valuation with its peers on the same date
Explanation
Sensitivity analysis changes one assumption at a time, such as growth or discount rate, and observes the effect on output value. Assigning probabilities relates to scenario analysis, and peer comparison relates to cross-sectional analysis.
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