Risk
Scenario analysis
Examining portfolio outcomes across several plausible futures rather than forecasting one.
How it works
Instead of a single expected path, scenario analysis defines a handful — high inflation, recession, rapid growth — and computes the portfolio’s result under each.
The value is in finding scenarios where the portfolio breaks. A plan that works in four worlds and fails catastrophically in the fifth needs to know that in advance.
Related terms
- Stress testModelling what a portfolio would do under a specific severe scenario, rather than under average conditions.
- Monte Carlo simulationRunning thousands of randomised return paths to see the range of outcomes a plan could produce.
- Sequence-of-returns riskThe risk that poor returns early in retirement do lasting damage, even if average returns are fine.
More in Risk
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.