Probabilistic Approaches: Scenario Analysis, Decision Trees And Simulations

In the last paper, the authors examined ways in which they can adjust the value of a risky asset for its risk. Notwithstanding their popularity, all of the approaches share a common theme. The riskiness of an asset is encapsulated in one number - a higher discount rate, lower cash flows or a discount to the value - and the computation almost always requires one to make assumptions (often unrealistic) about the nature of risk. In this paper, they consider a different and potentially more informative way of assessing and presenting the risk in an investment.