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Comprehensive Guide on _Sensitivity Analysis

Sensitivity Analysis in Portfolio Management helps investors understand how changes in key variables affect portfolio returns and risks. It involves identifying key drivers, scenario testing, risk management, and optimizing asset allocation to maximize returns while minimizing risks. The guide emphasizes the importance of communication with stakeholders and dynamic decision-making to adapt to market changes.

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2 views11 pages

Comprehensive Guide on _Sensitivity Analysis

Sensitivity Analysis in Portfolio Management helps investors understand how changes in key variables affect portfolio returns and risks. It involves identifying key drivers, scenario testing, risk management, and optimizing asset allocation to maximize returns while minimizing risks. The guide emphasizes the importance of communication with stakeholders and dynamic decision-making to adapt to market changes.

Uploaded by

exness.vk8237
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Sensitivity

Analysis in
Portfolio
Management
(Comprehensive Guide)
What is Sensitivity
Analysis ?
Sensitivity Analysis helps
investors understand how
changes in key variables
(interest rates, inflation, asset
prices) impact their portfolio
returns and risks.

It's like a financial "what-if"


engine.
.

KEEP SWIPING
Identifying Key Drivers

Sensitivity analysis highlights which


factors drive portfolio performance
the most.
E.g: A bond portfolio may be highly
sensitive to changes in interest
rates.
Tools:
1. Regression analysis
2. Factor models (Fama-French, APT)
Excel Tip: Use =CORREL() to
identify correlations between
portfolio returns and key drivers
KEEP SWIPING
Scenario Testing

Test how your portfolio performs


under different market conditions.

E.g., What if:


a. Inflation jumps to 7%?
b. Crude oil crosses $100/barrel?
This helps prepare for multiple
future outcomes.

Excel Tip: Use Data Table under


What-If Analysis to simulate
multiple scenarios for input
variables.
KEEP SWIPING
Risk Management
Quantify risk exposure to market
movements.
Use metrics like:
Delta (price change sensitivity)
Duration (interest rate sensitivity)
Beta (market exposure)

Adjust your portfolio to minimize


unwanted risks.
Excel Tip: Use =STDEV.P() for
historical volatility and =SLOPE() to
estimate beta of a stock relative to
market.
KEEP SWIPING
Portfolio Optimization

Fine-tune your asset allocation


based on identified sensitivities.

E.g.,
If equities and REITs are both
inflation-sensitive, reduce
overlap.

Goal: Maximize return for the given


risk.
Excel Tip: Use Solver to optimize
asset weights for a desired
risk/return tradeoff.

KEEP SWIPING
Communicate with
Stakeholders
Use charts and tables to explain
risk exposure.
This enhances transparency and
trust with Clients, Partners &
Regulators
E.g: "Your portfolio may fall 10%
if rates rise by 2%."

Excel Tip: Use Combo Charts and


Slicers in PivotTables to build
dynamic dashboards.

KEEP SWIPING
Dynamic Decision-
Making
Markets change fast. Sensitivity
analysis enables quick, informed
reactions.
E.g., If oil prices surge, hedge
airline stocks before losses mount.
Tip: Build dashboards to monitor
and adjust in real time.
Excel Tip: Use OFFSET, INDEX,
and MATCH functions with scroll
bars to build interactive
dashboards.

KEEP SWIPING
Stress Testing
Extreme version of sensitivity
analysis.

Simulate market shocks like 2008


crises, War, Corona etc.
Used By: Banks, Mutual Funds,
Insurance Firms.

Regulatory Requirement (Basel III,


RBI)

Excel Tip: Use Monte Carlo


Simulation with RAND() or
NORM.INV(RAND(),mean, st.dev() to
simulate distributions under stress.
KEEP SWIPING
Summary Table
Purpose Benefit

Identify Drivers Focus on key risks

Scenario Testing Prepare for market uncertainty

Risk Management Build resilient portfolios

Optimization Align assets with strategy

Stakeholder
Build trust with transparency
Communication

Dynamic Decisions React to market changes fast

Stress Testing Ensure long-term stability

KEEP SWIPING
COMMENT, REPOST &
STAY TUNED for More
Valuable insights

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