The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

Conclusion

Estimating the risk-adjusted value for a risky asset or investment may seem like an exercise in futility. After all, the value is a function of the assumptions we make about how the risk will unfold in the future. With probabilistic approaches to risk assessment, we not only estimate an expected value but also get a sense of the range of possible outcomes for value, across good and bad scenarios:

• In the most extreme form of scenario analysis, you look at the value in the best-case and worst-case scenarios and contrast them with the expected value. In its more general form, you estimate the value under a small number of likely scenarios, ranging from optimistic to pessimistic.

• Decision trees are designed for sequential and discrete ...