How is scenario analysis different from sensitivity analysis?

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AcadiFi · Accepted Answer

Sensitivity analysis flexes inputs one at a time and treats them as independent. Scenario analysis changes a coherent set of inputs together...

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For Quillmark's new product, a rigorous structure: (1) Base case — consensus assumptions (price, volume, costs). (2) Downside — recession scenario where unit volume drops 20%, price dilution of 8% via promotions, input costs rise 6% due to supply friction, and WACC rises 150 bps on risk-off sentiment. (3) Upside — share gain scenario where volume is 15% above plan, price rises 3%, and WACC is unchanged.

Compute NPV in each scenario. If base is $18M, downside is -$6M, and upside is $34M, assign subjective probabilities (say 60%/25%/15%) to get an expected NPV = 18*0.6 + (-6)*0.25 + 34*0.15 = $14.4M. More importantly, quantify the probability-weighted downside.

For AcadiFi CFA candidates: a good scenario design covers the 2-3 most important joint risks rather than every combination of inputs. The classic trap is assuming scenarios are exhaustive and mutually exclusive — in reality, tail events often combine features of multiple scenarios. Scenario analysis complements but does not replace simulation analysis when you need a full probability distribution of outcomes.

How is scenario analysis different from sensitivity analysis?

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