normally I'd ask this in the investing/markets section but the question is mainly geared toward hedge fund professionals so please forgive the intrusion.
when you perform scenario based analysis and you compute the classic risk-to-reward ratio (3-1: 3 upside vs 1 downside), do you generally assign probabilities to this output?
if you think FB has 30% upside and 10% downside, do you also include the chances of it happening (50% / 50% for the ratio to make sense) ? that is, do you additionally say: FB has 30% upside with a 40% chance whereas the stock can go down 10% with a 60% chance?
and if so, do you have some general rule of thumb? I mean it's not like we can weigh all the different things that might happen that unlock value (or disrupt it). Also, I understand this analysis is best suited when evaluating binary-events such as FDA approvals and / or special situations rather than, say, industrial stocks which are more prone to a sensitivity analysis
BUT, I value your input very much and I would love to hear what your best practices are because I've always been curious about this and because, well, the buyside is where I'd like to end up.
thank you very much for your time
Hedge Fund Interview Course
- 814 questions across 165 hedge funds. Crowdsourced from over 500,000 members.
- 11 Detailed Sample Pitches and 10+ hours of video.
- Trusted by over 1,000 aspiring hedge fund professionals just like you.