Fin415 Week 3 Problem Set

Risk Measurement Techniques Paper

Timothy McLain

FIN/415

August 11, 2014

Peter Harper

Risk Measurement Techniques Paper

The technique of calculating the possibilities of distributions and its assigned investment risk defines Quantitative analysis (Harrington, Niehaus, 2004). A mathematical fact, the analysis determines a numerical value. Riskier investments promise greater rates of returns and the possibility of greater loses. The analysis require the use of probability distributions. Developed by career investors, risk measurement techniques provide useful tools for investment decision-making (Harrington, Niehaus, 2004). Business managers implement distribution models to determine if cash flow from investments yield acceptable profits with manageable risk.

Sensitivity Analysis

Sensitivity Analysis represents the technique for determining the difference between values of independent variables and their influence on specific supposition dependent variable. (Harrington, Niehaus, 2004). The sensitivity technique uses limits relying on multiple variables providing important investment information. Interest rate modification effects on bond rates represent a sensitivity analysis technique. The technique forecasts investment scenarios to assist business leaders in determining investment soundness. The information provided from the analysis determines if variable modifications influence target variables. Calculating the precise Net Present Value (NPV) sensitivity analysis aids business professionals in investment decisions (Harrington, Niehaus, 2004). Graphing the analysis provides improved understanding of the NPV and insight into determine the effects of variable changes resulting in riskier investments.

Scenario Analysis

Scenario Analysis represents the technique for determining the approximate portfolio valuation of a portfolio allowing the investor to adjust proposed time intervals (Harrington, Niehaus, 2004). This analysis predicts portfolio value...