Sensitivity Analysis
A technique that measures how changes in a single input variable affect the value of an investment or model output.
What is Sensitivity Analysis?
Sensitivity analysis is a quantitative technique that examines how the output of a financial model — such as a company's valuation, a bond's price, or a portfolio's return — changes in response to a systematic variation in one input variable at a time, holding all other variables constant. It isolates the directional impact and magnitude of uncertainty in key assumptions. In equity valuation, sensitivity tables show how a DCF value changes as the discount rate and terminal growth rate vary across a range. In fixed income, duration measures the sensitivity of a bond's price to changes in interest rates — a specific form of sensitivity analysis. In options, the Greeks (delta, gamma, vega, theta) are sensitivity measures. For portfolio risk management, sensitivity analysis reveals which variables most influence portfolio outcomes, guiding stress testing and hedging. Unlike scenario analysis, which simultaneously changes multiple variables in a coherent narrative, sensitivity analysis examines one variable in isolation.
Example
An analyst values a tech company using DCF with a 10% discount rate and 4% terminal growth rate, arriving at $150/share. A sensitivity table varying the discount rate (8%–12%) and terminal growth rate (2%–6%) shows the value ranges from $95 to $280 — a 3× range from assumptions alone. The CEO compensation and CapEx forecasts, by contrast, shift value by only ±5%, revealing discount rate and growth as the dominant sensitivities.
Source: Damodaran Online — DCF Valuation