Probabilistic Approaches to Valuation: Scenario Analysis, Decision
Trees, and Simulations. Chap. 33-34
Problem with the discount model is that we can’t include risk.
Probability weighted average - take probabilities multiplied with outcomes to get
mean.
Multiple-scenario analysis
1. Determine factors to build around.
2. Determine the number of scenarios.
3. Estimate asset cash flow for each scenario
4. assign probabilities to each scenario based analysis.
5. take weighted average
2008 crisis what can happen with Fargo (sensitivity analysis)
quick bounce back to normalcy 10%
slow bounce back 60%
new world order 30%
Each case outcome has a value of equity, when you take that multiplied with the
probabilities and get an expected value.
Decision Trees
Trees, and Simulations. Chap. 33-34
Problem with the discount model is that we can’t include risk.
Probability weighted average - take probabilities multiplied with outcomes to get
mean.
Multiple-scenario analysis
1. Determine factors to build around.
2. Determine the number of scenarios.
3. Estimate asset cash flow for each scenario
4. assign probabilities to each scenario based analysis.
5. take weighted average
2008 crisis what can happen with Fargo (sensitivity analysis)
quick bounce back to normalcy 10%
slow bounce back 60%
new world order 30%
Each case outcome has a value of equity, when you take that multiplied with the
probabilities and get an expected value.
Decision Trees
