What is the difference between scenario analysis and sensitivity analysis as described in the chapter?

Scenario analysis involves changing multiple variables at once but only allowing them to take on a limited number of values. In contrast, sensitivity analysis changes one variable at a time while allowing it to take on many different values.

Scenario analysis and sensitivity analysis are both techniques used to evaluate potential outcomes in financial forecasting. Scenario analysis considers multiple variables simultaneously, examining how different combinations of these variables affect outcomes, but restricts them to a few specific values. Sensitivity analysis, on the other hand, focuses on the impact of changing a single variable at a time, allowing it to vary across a broader range of values. This distinction highlights the different approaches each method takes in assessing risk and uncertainty in financial projections.