Forecasting-Financial-Statements-Risk

Forecasting-Financial-Statements-Risk - • For each state...

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Forecasting Financial Statements Introduction to Risk FIN 340 Prof. David Allen
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Introduction In our earlier discussion of forecasting, we assumed that the values of the inputs (assumptions) were known point values. In reality, most of our assumptions are subjects to error.
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Methods for Introducing Risk There are three principle techniques used to introduce uncertainty (risk) into the analysis: 1. Sensitivity analysis: change one input at a time, and observe the effect on the output. 2. Scenario analysis: define several possible “states of nature” such as: 1) worst possible outcome, 2) most likely outcome, and 3) best possible outcome.
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Unformatted text preview: • For each state of nature, determine what the likely values are for each input, and observe the output. Methods for Introducing Risk • There are three principle techniques used to introduce uncertainty (risk) into the analysis: 1. Monte Carlo simulation: Define probability distributions for the inputs, and conduct a large number of “trials” in which each random variable takes on a value from its distribution. • The results is a large number of possible outcomes, for which we can plot the distribution and get a feel for the range and other measures of dispersion. Using the Scenario Analysis Tool in Excel...
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Forecasting-Financial-Statements-Risk - • For each state...

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