Nothing is ever certain in finance and investing, except taxes, maybe. Whether investors are practically investing or trying to understand the concept of risk and return, they should attempt to account for as many probabilities as possible. These probabilities can broadly be grouped into three what-if scenarios: the base case, the best case, and the worst case. This spectrum, from best to worst, should determine how much risk an investor can take and how much return they can expect.
The goal of this article is not to discuss complex financial models, which are typically linked to scenario analysis, but to simplify this analytical method so investors can use it in practice. An example of this analysis will be illustrated later.
