How sensitive is sensitivity analysis?
SUMMARY
INTRODUCTION
The U.S. stock market is currently being driven by a small group of stocks, creating a concentration risk not seen in decades. While comparisons to the 2000 tech bubble are common, a key difference is that today’s leading companies, such as Microsoft and Apple, are highly profitable businesses.
Still, the Shiller CAPE ratio recently surpassed 40 – a level last reached in 2000 – indicating that valuations are very expensive. A common way to assess portfolio risk is through sensitivity analysis, asking questions like: how much would my portfolio fall if the Nasdaq dropped by 50%?