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What Is Investment Decision Analysis?

Geri Terzo
Geri Terzo

An investment decision analysis is designed to lead a business to make a well-informed move surrounding future investment returns based on certain forecast models. Expectations can be based on past performance of certain assets or investments and should take into account any existing or potential risks that could affect results. Investment decision analysis could be a forecasting model that is used to quantify the risks and expected returns from an investment exposure. The process typically involves multiple parties, such as the investor and an analyst, or some type of software solution that can facilitate the investment decision analysis process.

Throughout investment decision analysis, collaboration between at least two parties should exist. An analyst will likely derive some formula, model, or mathematical equation that can be applied to an investor's circumstances and needs to form an analysis. The investor must be willing to communicate certain goals and possible aversions to risk that might influence the results of an investment analysis and decision-making process.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

Prior to reaching a decision to make an investment, a business or individual could analyze whether the risks tied to following through with the allocation are appropriate in comparison with the expected returns, or profits. In order to perform investment decision analysis, certain parameters should be established. For instance, the duration of the investment, whether it is short-or-long term in nature, relative to the desired results are details that can support the analysis process.

Evaluation techniques used to determine which factors appropriately assess whether or not an investment might perform well depends largely on the type of project or assets being pursued. It's also possible that a set of unknown factors could interfere with the anticipated results from an investment. Analysis includes using historical performance and allowing for certain unknown factors to affect an investment to form a realistic expectation.

There are tools, such as software programs, that can be tailored based on certain criteria to lead a business or individual to compare advantages and disadvantages of an investment decision analysis. Using software solutions is likely to require the disclosure of certain conditions and expectations. This may include a desired financial result from an investment, any vulnerabilities that can be improved to reduce the chances for under-performance in an investment, and a realistic assessment of the resources available to allocate to a project or asset. Investment decision analysis might also review the ramifications and proper response if pre-determined investment goal is achieved or missed outside of an anticipated time frame.

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