Chapter 22 presented a case study in creating value from uncertainty, and chapter 25 presented the use of efficient frontier analysis in SRM. Assume you are the project lead for the analysis team that uses Efficient Frontier Analysis to evaluate risks of the portfolio presented in chapter 25. How would you explain the results of the analysis to non-technical decision makers? What recommendation would you make, assuming the risk appetite presented in chapter 25?
To complete this assignment, you must do the following:
A) Create a new thread. As indicated above, assume you are the project lead for the analysis team that uses Efficient Frontier Analysis to evaluate risks of the portfolio presented in chapter 25. How would you explain the results of the analysis to non-technical decision makers? What recommendation would you make, assuming the risk appetite presented in chapter 25?
ANSWER ALL OF THE QUESTIONS ABOVE IN YOUR THREAD
B) Select AT LEAST 3 other students’ threads and post substantive comments on those threads, evaluating the pros and cons of that student’s recommendations. Your comments should extend the conversation started with the thread.
ALL original posts and comments must be substantive. (I’m looking for about a paragraph – not just “I agree.”)
NOTE: These discussions should be informal discussions, NOT research papers. If you MUST directly quote a resource, then cite it properly. However, I would much rather simply read your words.
ITS 835
Chapter 25
Uses of Efficient Frontier Analysis in Strategic Risk
Management
Enterprise Risk Management
Professor Michael Solomon
Introduction
• Strategic risk management framework
• Modern portfolio theory
• Practical application of risk measurement for insurance
• Sample case study
• Intended uses
Strategic Risk Management
Framework
• Enables organization to discover risks
• Across organizational boundaries
• Continuous cycle
• Considers interactions of multiple risks
• Combines risk appetite and risk tolerance
• Defines exploitable risks
Strategic Risk Management
Modern Portfolio Theory
• Mathematical model – from 1950s
• Risk is standard deviation
• When portfolio is weighted combination of assets
• Rp – return of portfolio
• Ri – return of asset i
• Wi – weighting of asset i
Practical Application of Risk
Measurement for Insurance
• Purpose is to optimize insurance placements
• And risk limits
• Tail value at risk of loss – TVaRL
• Expected value of loss, given that an event has occurred
Sample Case Study
• Three basic risks
• Earthquake exposure to buildings
• Workers’ compensation insurance
• General liability insurance
Portfolio Options
Earthquake Options
Workers’ Compensation Options
General Liability Options
Combined Portfolio Options
Intended Uses
• Help large organizations
• Risk management
• Portfolio management
• Insurance and non-insurance risks
• Best fit
• Established ERM
ITS 835
Chapter 22
JAA Inc. – A Case Study in Creating Value from Uncertainty
Enterprise Risk Management
Professor Michael Solomon
Introduction
• Business background
• Initial steps
•
Evolution of Risk Management
• Introduction of ISO 31000 and HB 436 to JAA
• Bringing everything together
Business Background
• JSS is a clothing wholesaler and retailer
• Founded in 1972
• Went public in 1998
• Three operating segments
• U.S. wholesale
• U.S. retail
• International (wholesale and retail)
• 57 retail stores in 10 countries
Initial Steps
• Strategic objectives
• Maintain market leadership
• Sustain technology leadership
• Strengthen global presence
• Deliver quality service
• A leader in compliance with all laws and regulations
• Establish a governance system
• Multiple committees, each with specific responsibilities
Governance Framework
Evolution of Risk Management
• Lack of strategic risk management led to many problems
• Communication
• Missed/lost opportunities
• Lack of commitment to objectives
• Declining quality
• Identified gaps in risk management
• Engaged in aggressive internal training
• Soft skills
• Team building
• Management planning
Introductions of ISO 31000 and HB 436
• JAA adopted ISO 31000
• HB 436 provided extensive implementation guidance
• ISO 31000 was basically an upgrade of the framework
JAA was already using
• ISO 31000 framework formalized JAA’s ERM
• Defined organization and process
Using Context for Risk Criteria
Bringing Everything Together
Risk Map
Risk Atitude
Student 1:
The main intention of this framework is to support large corporate organizations with their portfolio management and process of the risk management. The framework is able to handle insurance risk and non-insurance risk. It is suggested to use the framework within the recognized enterprise risk management correction. James Lam has defined four benefits to risk management which are as follows: handling risk is managements’ job; the instability of the earnings will be reduced by the managing risk; the shareholders’ value can be maximized with the help of managing risk; financial security and job security are promoted by the risk management (Zhou & Xu, 2018)
Handling risk is managements’ job–the duty of the management is to use the critical information of the business to manage the risk. This will lead to give transparency in managing costs and improves the understanding of the risk.
The instability of the earnings will be reduced by the managing risk–with the help of the activities of the risk management, the top companies will able to manage their earnings instability in a better way.
The shareholders’ value can be maximized with the help of managing risk–the companies can be able to increase their shareholders’ value with maximum percentage and also can be able to identify the opportunities for business optimization and risk management by using the risk based program. Volatility can be managed well and business model performance can be extended with correct information that is spread across the organization (Liang et al., 2017)
The efficient frontier will be send to the business leaders directly and they will become the holders of the risks for their respective areas of influence. The efficient frontier has to learn the language of the risk. It is fundamentally assumed that the risk transfer and lines of insurance will be modelled properly. This is significant assumption, as plain modelling foibles, internal disputes, information asymmetry and data limitations will be easily disturb the best intentions of the framework. It is very necessary to test any kind of model and if possible back test the model and involvement of different business leaders is also important to examine the results of the model. It is important to involve independent experts to question and examine the assumptions of the model (Tajani & Morano, 2017)
References
Liang, J., Zhong, M., Zeng, G., Chen, G., Hua, S., & Li, X. et al. (2017). Risk management for optimal land use planning integrating ecosystem services values: A case study in Changsha, Middle China. Science Of The Total Environment, 579(2), 1675-1682.
Tajani, F., & Morano, P. (2017). Evaluation of vacant and redundant public properties and risk control. Journal Of Property Investment & Finance, 35(1), 75-100.
Zhou, W., & Xu, Z. (2018). Portfolio selection and risk investment under the hesitant fuzzy environment. Knowledge-Based Systems, 144(2), 21-31.
Student 2:
Uses of Efficient Frontier Analysis in SRM Options
SRM – Strategic Risk Management framework is a closed system, generally it is a continuous cycle with several opportunities for different parts of an organization which able to recognize and examines the risk profiles within the strategy-setting context. With the analytical framework the risk appetite and risk tolerance notions will be combined with the scenario and stress testing speaks which were more comprehensive. SRM framework of decision-makers intended to drive the set of analytical informed discussions. The organizational strategic objective was to accelerate or impede creating values with the strategic risk management framework which is mainly focused on the risks that are made (Bhavsar, 2018).
Strategic objectives, risks that are arising from the plans to meet the objectives which were untapped. In two aspects the SRM will serve as a competitive advantage source for decision making. The first one is objective risks themselves and the other is to meet the objectives which will arise from risks. Some of the organizations may include objective risks themselves with the little considerations that are given to the risks arising from the plans that able to meet the objectives. The emerging risks and dynamic risks of the underlying strategy that are evolving some additional opportunities. Risk appetite and tolerance of formal statements can be used that knowledge for proper selection options inefficient frontier (Restemeyer, 2018).
There is a wide variety of options and risk levels where the options were lying very closer to the frontier and it results in the more efficient and effective options and thus it results from the efficient options. We have a similar variety of options that have risk levels with a tighter range. The efficient frontier slope results very shallowly. These options will lie to the frontier and thus it results in inefficient options. For worker’s compensation, the risk appetite was using in an organization. There is a greater chance of results which would extreme the options (Viscelli, 2017).
References
Bhavsar, T. R., Esbitt, D. L., Yu, P. A., Yu, Y., & Gorman, S. E. (2018). Planning Considerations for State, Local, Tribal, and Territorial Partners to Receive Medical Countermeasures From CDC’s Strategic National Stockpile During a Public Health Emergency. American Journal of Public Health, 108, S183–S187.
https://doi.org/10.2105/AJPH.2018.304472
Restemeyer, B., van den Brink, M., & Woltjer, J. (2018). Resilience unpacked – framing of “uncertainty” and “adaptability” in long-term flood risk management strategies for London and Rotterdam. European Planning Studies, 26(8), 1559–1579.
https://doi.org/10.1080/09654313.2018.1490393
Viscelli, T. R., Hermanson, D. R., & Beasley, M. S. (2017). The Integration of ERM and Strategy: Implications for Corporate Governance. Accounting Horizons, 31(2), 69–82.
https://doi.org/10.2308/acch-51692
Student 3:
The efficient Frontier analysis figures the bend that plots a target an incentive against changes to a prerequisite or imperative. Typical use is for looking at portfolio returns against various risk levels with the goal that speculators can amplify execution and limit chance. If you need to utilize this kind of investigation, you have to characterize a scope of qualities for a prerequisite or limitation bound.
One use for Efficient Frontier examination is to apportion assets among an arrangement of interests in the most productive manner. Financial models and visual techniques are now and again developed in Economics to represent ideas, for example, organic market, buyer conduct, or conversion standard hypothesis.
The Efficient Frontier rearranges a mind-boggling portfolio the executives’ issue by featuring and explaining some fundamental inquiries all associations are confronting: a shortage of assets, proficiency of advantage assignment, exchange offs among cost and worth, open door cost, and the measure of breaking the imperatives.
The Efficient Frontier is only one necessary piece of a fruitful portfolio of the board program. Just by then, is it conceivable to utilize the Efficient Frontier structure to see further and expel imperatives and to advance the association’s benefit designation.
Recommendations
There is, obviously, no outright set in stone answer suggested by this procedure – senior administration consistently has an ultimate conclusion on which portfolio situation to execute. In any case, for an association wishing to choose the “right” ventures, it ought to evade impromptu, unstructured techniques, and influence a straightforward and robust procedure, in light of realities and built from the base up. Just this will guarantee the correct data is accessible to adjust activities to critical destinations and to oversee conditions and external factors effectively.
References
Yang, J., Su, J., & Song, L. (2019). Selection of manufacturing enterprise innovation design project based on consumer’s green preferences. Sustainability, 11(5), 1375.
Antony, J., & Gupta, S. (2019). Top ten reasons for process improvement project failures. International Journal of Lean Six Sigma.