This Month: Introductory Risk & Decision Analysis Software Demonstrations in Four Different Languages

Introduction to Risk & Decision Analysis using @RISK & The DecisionTools Suite This month we are offering our Introduction to Risk and Decision Analysis using @RISK and the DecisionTools Suite webcast in a variety of languages including German, French, Portuguese and English.

Our Regional Sales Managers and Trainers have designed these webcasts to provide an entry-level introduction into probabilistic analysis and will show how Monte Carlo simulation and other techniques can be applied to your everyday business analyses. If you build models in Excel then Palisade solutions can almost certainly help you to make more informed decisions, right from your desktop.

Sign up today for the webcast presented in the language of your choice!

Deutsch:
Einführung zur Risiko - & Entscheidungsanalyse
mit @RISK und der DecisionTools Suite

11. Februar 2014 - 10:00 am CET
(9:00 am UTC/GMT, 4:00 am EST)
» Jetzt kostenlos registrieren

Français:
Introduction a l’analyse des Risques et décisions
avec @RISK et DécisionTools Suite

11 février 2014 - 10:00 am CET
(9:00 am UTC/GMT, 4:00 am EST)
» Inscrivez-vous gratuitement

English:
Introduction to Risk and Decision Analysis
using @RISK and the DecisionTools Suite

13 February 2014 - 11:00 am CET
(10:00 am UTC/GMT, 5:00 am EST):
» Register Now for Free

Português:
Análise Quantitativa de Risco Utilizando o
@RISK e o Decision Tools Suite

21 de fevereiro 2014 - 10:00 am Brasília Time
(1:00 pm UTC, 2:00 pm CET)
» Inscreva-se grátis

Também em Português, AMANHÃ:
Simulações de Séries Temporais com o @RISK
7 de fevereiro 2014 - 10:00 am Brasília Summer Time
(12:00 Noon UTC, 1:00 pm CET)


These webinars will explore some of the ways in which organizations are applying Palisade tools. From oil and gas, insurance and finance through to healthcare, defense and construction, @RISK and the other tools in the DecisionTools Suite enhance the decision making capabilities of some of the world’s most successful companies.

For nearly 30 years, Palisade software and solutions have been used to make better decisions. Cost estimation, NPV analysis, operational risk registers, portfolio analysis, insurance loss modeling, reserves estimation, schedule risk analysis, budgeting, sales forecasting, and demand forecasting are just some of the ways in which the tools are applied. The webinar will demonstrate how easy – and necessary – it is to implement quantitative risk analysis in any business.

If you would prefer to join us for a more in depth Training be sure to check out this previous post: Start the New Year Right with Palisade Risk & Decision Analysis Software Training

 

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Free Webcast this Friday: The Cure for the Flaw of Averages, Using Palisade DecisionTools Suite to Visualize Risk and Uncertainty

Presented by: Andrew Pulvermacher, Nighthawk Intelligence, LLC
When: Friday, March 21, 2014 at 11:00 am EDT

NightHawk Logo » REGISTER NOW for FREE

The Cure for the Flaw of Averages, Using Palisade DecisionTools Suite to Visualize Risk and Uncertainty will be presented by Andrew Pulvermacher of Nighthawk Intelligence, LLC. On Friday, March 21, 2014 at 11:00 am EDT, Mr. Pulvermacher will take you on a 50 minute journey through historical risk philosophies to today's industrial race to harness the benefits of risk based decision making. This session will cover the finer points of the Flaw of Averages and Probability Managements' cure of the Flaw of Averages. The presentation will wrap up with a demonstration of the immediate benefits that Palisade's DecisionTools Suite provides to the organizational decision making process through the illumination of risk and the interactive risk modeling.

Andrew Pulvermacher is the Founder and Chief Probability Officer at NightHawk Intelligence, LLC. NHI provides risk analysis services to their clients to develop high quality strategies through a better understanding of value in the context of risks and uncertainties. NHI works to transfer focus from descriptive data analytics to predictive analytics – improving insight and driving risk-informed decision making throughout the organization.

With over a decade of experience in analytics with companies such as Amazon, Best Buy, Merrill Lynch, and CUNA Mutual Group, Drew is focused on improving enterprise value through the use of Operation Research methodologies for enhancing productivity, efficiency, and profitability. With specific expertise in probability management, portfolio theory, and continuous improvement, Drew advances complex business processes and delivers innovative business development strategies for Fortune 20 corporations as well as small, community based businesses.

Click here to view his presentation from the 2013 Palisade Risk Conference in Las Vegas.

Learn more about last year's Palisade Risk Conference in Las Vegas here:
Risk Professionals Gather in Vegas for Palisade’s 2013 Risk Conference
 

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Custom Solutions within the Insurance Sector: Catastrophe and Large Loss Simulation Model

Insurance companies are now encouraged by regulation to perform assessment of their own risk exposure. Monte Carlo simulation, and particularly @RISK are extremely useful in performing assessments that can be used not only to satisfy regulators, but also to improve financial risk management within the company.

Waszink Actuarial Advisory in collaboration with Palisade's Custom Development Team created this Catastrophe and Large Loss Simulation Model to provide an output that includes the aggregate loss gross and net of reinsurance, and the reinsured loss.

In this example, an application was created using @RISK to generate the aggregate loss resulting from multiple large or catastrophic losses occurring within a given period of time. Aggregate losses are determined gross and net of any Excess of Loss Reinsurance.

Parametric distributions for frequency and severity of loss gross of reinsurance must be specified by the user. Frequency and severity are assumed to be mutually independent.

In addition, the user can specify an Excess of Loss Reinsurance program. The following features of the reinsurance program must be specified:

  • Number of layers
  • Limit and retention by layer
  • Reinsurance premium by layer
  • Number of reinstatements by layer;
  • Reinstatement premium as percentage of reinsurance premium

The output includes the aggregate loss gross and net of reinsurance, and the reinsured loss.

More example of Custom Development:

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Free Webcast this Thursday: "Exploring Oil & Gas Applications of @RISK and the DecisionTools Suite"

Register now for a free webcast to be presented by Rafael Hartke, Palisade's Oil and Energy Industry Consultant. "Exploring Oil and Gas Applications of @RISK and the DecisionTools Suite: Examples from Petrobras and Others" will demonstrate how the DecisionTools Suite can be used in oil and gas exploration, production, and project decisions.

JOIN US THIS THURSDAY - December 19, 2013 - 11:00am ESTRegister Now
"Exploring Oil and Gas Applications of
@RISK and the DecisionTools Suite:
Examples from Petrobras and Others"

For decades, @RISK has helped engineers and finance managers estimate unknown reserves, value new projects against each other, and craft optimal strategies. PrecisionTree, another tool in the DecisionTools Suite, is commonly used for drilling strategy discussions, production siting problems, and other multi-stage, sequential decisions. RISKOptimizer comes into play when companies need to determine the best “mix” of projects in their portfolio in order to maximize overall returns.

For many years, Rafael Hartke solved these types of problems at Petrobras, the state oil company of Brazil and one of the world’s largest producers. In this free live webcast, he will draw on his experiences to demonstrate how @RISK and the DecisionTools Suite can be applied to common types of issues faced by oil and gas producers, such as: estimation of unknown reserves, analysis of multi-play concessions, structure of complex partnership agreements, optimization of uncertain project portfolios, and more.

Rafael Hartke is also a contributing writer for Oil & Gas Monitor. Here are a few of his previous articles:

 

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Risk Analysis Solutions at LEGO Pave the Way for Inventive New LEGO Toys

LEGO Group has always been a trendsetter in the toy industry, perhaps due to its ability to both take on, and manage, risk.  Earlier this year, we covered how LEGO Group uses Palisade's @RISK to help it manage much of the risk it faces. The software helped the company consolidate its risk portfolio via Monte Carlo Simulations--evaluating the possibility of threats such as competitor infringements, currency risk and vendor breakdowns.

By looking at the chances of worst-case scenarios and comparing them to the risk tolerance that the company has set itself, the company could determine if it was able to take more aggressive policies.

Thus far, LEGO Group has been doing some exciting new approaches to product development; including the LEGO Cuusoo project, which is essentially a LEGO-only Kickstarter website. Users submit ideas for new types of LEGO sets and gather supporters for the project. All projects with 10,000 supporters or more are reviewed quarterly by LEGO.  The authors of the ideas selected by the company to become a new LEGO product receive a 1% royalty of  the total net sales of the product. Successful Cuusoo products include LEGO Minecraft, a LEGO Mars Rover, and, the latest, a LEGO Back to the Future set.

With Palisade's @RISK as a key tool in the LEGO Group's Enterprise Risk Management framework, the company was able to make informed strategic decisions and grow LEGO Group's profits at an impressive rate.


See Also: @RISK from Palisade plays key role in LEGO’s Enterprise Risk Management strategy

 

 

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Cost Risk Analysis Example Movie: Palisade's Custom Development Team uses @RISK's XDK for this custom application

Here is an example of a custom application written by Palisade Custom Development using @RISK's XDK in Excel. In this example, @RISK is used for cost risk analysis and estimation.  The application prompts the user for a three-point estimate for each cost item in the project as a way to recognize uncertainty in these cost elements.  A risk register is created using a simply colored grid interface.  Next, because in real life costs are seldom independent of each other, the user is able to set up correlations between related cost elements.  Finally, the user can define external risk events that will affect the total cost of the project. Automation takes the shape of an Excel add-in, which is shown to the user as a new Excel ribbon.

 

 

Custom Development in Excel

Palisade Custom Development has written applications for insurance, cost estimation, retirement planning, oil and gas prospecting, portfolio risk management, schedule-cost risk analysis and more – all utilizing @RISK technology in Excel. This means we can create risk analysis solutions for you using a range of powerful analytics, including Monte Carlo simulation, decision trees, statistics, neural networks, and optimization. In each case, the interface is customized to include only what the users need, hiding unused @RISK functionality and preventing user access to the underlying model logic. You can also automate processes like reporting, generating only the charts and data you want. The result is a tailored application ready to roll out to your workgroup. 
 

New XDK Functionality and Documentation in version 6.2

Excel Developer’s Kits (XDK) automatically come as part of the DecisionTools software which includes, @RISK, PrecisionTree, Evolver, StatTools, and NeuralTools. XDKs allow you to automate and customize the tool within Excel using Excel’s built-in VBA programming language. In @RISK 6.2, the XDK has been updated to include new functionality for the automation of @RISK graphs and simulation filters, as well as several additional improvements. For most  products, the XDK now includes a new “Automation Guide” to help you get started quickly. In addition, new videos and example files have been added to the XDKs to help you use this powerful feature.

» See XDK videos

 
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See how a customized Retirement Saving template assesses the performance of a portfolio in future years

Here is an example of a custom application written by Palisade Custom Development using @RISK's XDK in Excel. In this example, @RISK is used to analyze the investment of funds for retirement planning.  The application prompts the user for profile characteristics of the client and portfolio parameters. 

Once the information is entered, the application runs an @RISK simulation to assess the performance of the portfolio in future years as well as the effects of various withdrawal rates after retirement.  Results are presented in tables and graphs.

This video demonstrates how easy it is to utilize this Custom Application:
  1. Define Profile Parameters
    The user inputs the profile characteristics of the individual whose profile is to be modeled. 
     
  2. Define Model Parameters
    The next step is to add the probability distributions for the return of each of the investments. 
     
  3. Simulate and View Results
    Observe multiple simulations and view the custom reports that are provided.
     
Automation takes the shape of an Excel add-in, which is shown to the user as a new Excel ribbon. 
 

Custom Development in Excel

Palisade Custom Development has written applications for cost estimation, retirement planning, oil and gas prospecting, portfolio risk management, and more – all utilizing @RISK technology in Excel. In each case, the interface is customized to include only what the users need, hiding unused @RISK functionality and preventing user access to the underlying model logic. You can also automate processes like reporting, generating only the charts and data you want. The result is a tailored application ready to roll out to your workgroup. Because the application is in Excel, the training required for users is minimal. XDKs come with the DecisionTools software PrecisionTree, StatTools, NeuralTools, RISKOptimizer, and Evolver as well as @RISK. This means we can create risk analysis solutions for you using a range of powerful analytics, including Monte Carlo simulation, decision trees, statistics, neural networks, and optimization. 
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How to Create a Custom Application for Stock Portfolio Optimization, Right in Your Spreadsheet

This is an example of the use of @RISK automation applied to stock portfolio optimization. It is a custom application written by Palisade Custom Development using @RISK’s XDK in Excel. 

The steps outlined in the Stock Portfolio Optimization example movie:
  1. Obtain Price & Weight Data
    The user will first define a portolfio of stocks. 
     
  2. Run Analysis & Review
    The next step is to run the analysis for the returns of each security. 
     
  3. Fit Data & Simulate
    The third step is to obtain the distributions that fit the historical return of the portoflio. Distributions of 10 will be used as a base for prediting gains or losses using a simulation. 
     
  4. Optimize & Generate Efficient Frontier
    The last step is to run the optimization process and maximize the portfolio's mean return, given certain constraints. Another feature available is to get the Efficient Frontier of the portfolio.
Automation takes the shape of an Excel add-in, which is shown to the user as a new Excel ribbon. 
 

Custom Development in Excel

Palisade Custom Development has written applications for cost estimation, retirement planning, oil and gas prospecting, portfolio risk management, and more – all utilizing @RISK technology in Excel. In each case, the interface is customized to include only what the users need, hiding unused @RISK functionality and preventing user access to the underlying model logic. You can also automate processes like reporting, generating only the charts and data you want. The result is a tailored application ready to roll out to your workgroup. Because the application is in Excel, the training required for users is minimal. XDKs come with the DecisionTools software PrecisionTree, StatTools, NeuralTools, RISKOptimizer, and Evolver as well as @RISK. This means we can create risk analysis solutions for you using a range of powerful analytics, including Monte Carlo simulation, decision trees, statistics, neural networks, and optimization. 
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Free Webcast this Thursday: "Modeling Multi-Staged Investments with @RISK" with Eric Torkia

Register now for a free webinar to be presented by Eric Torkia. Don't miss this opportunity for inside tips from a successful consultant who uses Palisade risk and decision analysis software solutions to address current problems in financial risk analysis.

"Modeling Multi-Staged Investments with @RISK"

Free webcast this Thursday, 25 July 2013
11am EDT

When planning a multi-staged investment such as new product development or the deployment of a new asset consisting of multiple stage gates, the consequences on analyzing NPV risk are substantial. This free live webcast will show you how to model multiple gates as well as their impact on financial performance. Also presented in this model are how to assess completion stages and probabilities of investment success:

  • Overview of traditional discounted cash flows versus expanded NPV
  • Understanding and modeling product pipelines
  • Integrating expert judgment/opinion into your predictions
  • How to combine multiple staged investments into an optimized investment portfolio

We will discuss these topics as well as present practical models and applications using @RISK.

» Register now for the free webcast "Modeling Multi-Staged Investments with @RISK"

About the Presenter

Eric Torkia, MASc is a senior management consultant/trainer and business analyst. He has collaborated with some of the world's most recognized organizations to ensure the optimal design and delivery of enterprise systems, analytics as well as new forecasting and decision making processes.

Eric combines a unique set of skills and competencies revolving around performance, risk and change management to bring about durable business performance improvements: Financial and project based valuations, Project Risk Analysis on 1+ billion dollar projects, Performance Management business analysis and consulting, Spreadsheet Modeling and VBA automation for simulation, forecasting and optimization, Change Management consulting and training and instructional design relating to the adoption and implementation of enterprise analytics.

Eric’s academic background includes a Master’s degree in information systems management from the University of Québec in Montreal as well as a BBA in international marketing and management from Northwood University Florida.

» View the complete webcast schedule, and see past presentations in the Archive

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January 2013 Academic Enews: Illinois State's MBA Corporate Finance uses @RISK for Advanced Techniques

Palisade January 2013 Academic Enews
In This Issue

» Illinois State's MBA Corporate Finance uses @RISK for Advanced Techniques

"Just like Excel itself, @RISK does its work without involving you in its computational complexities. So students who may have been scared of stats and data analysis before can feel perfectly at ease creating their simulationsand so, they want to do more."
     Dr. Domingo Castelo Joaquin, College of Business, Illinois State University

» Recent School Adoptions

» Licensing Options

» Teaching Tips & Examples
   Hedging with Futures

» Tech Tip
   RiskCollect

» Textbook of the Month
   Statistics for Business and Economics

» Featured White Paper
   A participatory approach for integrating risk assessment into rural decision-making

» Academic Live Webcasts
   • Portfolio Management using @RISK
   • @RISK for Engineers

» Worldwide Training Schedule

» About Palisade and the DecisionTools Suite

» Story to Share?

 

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@RISK from Palisade plays key role in LEGO’s Enterprise Risk Management strategy

LEGO's Enterprise Risk Management strategyOperational risk management has been a key part of the LEGO Group’s strategy for many years. The approach is used to handle issues including supply disruptions, demand volatility, currencies, employee health and safety, and product quality and safety.

Today, the sophistication of LEGO’s Enterprise Risk Management (ERM) framework is widely recognised. It is one of the foremost companies to use Monte Carlo simulation to quantify risk and present key risk information to its board of directors for decision-making purposes. @RISK from Palisade helps the LEGO Group to manage much of the risk it faces. This gives the company a true understanding of the volatility that it believes is inherent in its activities, in order that it can act to pre-empt it.

The LEGO Group uses @RISK to consolidate its risk portfolio. The standard way to calculate overall risk is to multiply the likelihood with the impact for each risk, and add up the total for the portfolio giving an average loss. The LEGO Group however takes a more strategic approach, in the belief that risk management is about extremes, not averages. It wants to know what will happen in the 10% chance that something does occur, not the 90% chance that it doesn’t.

LEGO Risk Management therefore identifies all risks it faces which include factors such as competitor infringements, currency risk and vendor breakdown (if a packaging vendor suffers a strike or a fire, for example, this impacts LEGO’s ability to do business). It then quantifies the risks with @RISK so that each risk is assessed in terms of the chance of it happening and the cost / impact if it does.

Once management has defined figures for all risk factors, it adds up the total exposure that it faces using a Monte Carlo simulation. From this the 5% worst-case exposure is looked at, and compared to the risk tolerance that the company has set itself, based on its earnings, to see if this is acceptable. If it is above the risk exposure, risk handling needs to be addressed to reduce the risk. If it is below, the company is allowed to follow a more aggressive – or ‘risky’ - policy.

Knowing its risk tolerance and consolidated exposure against its actual tolerance enables management to make informed and intelligent decisions about its capacity to take on more risks or be more cautious.

Defining and addressing strategic and operational risks enable the company’s managers to take prudent and proactive mitigating actions, which result in better performance.

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Free Webcast this Thursday: "Portfolio Management using @RISK" with Matt Rosenberg

Join us this Thursday, January 17, 2012, for a free live webcast entitled, "Portfolio Management using @RISK " to be presented by Matthew H. Rosenberg.

This free live webcast is intended to show the benefits of using Monte Carlo simulation in the processes of portfolio construction, and portfolio management for individuals, families and institutional investors. Topics will include a general overview of the portfolio management processes, as well as specific examples showing the use of @RISK for risk management within these processes.

Mr. Rosenberg is Managing Partner for RoseCap Investment Advisors, LLC, a private investment management and financial planning firm in Grand Junction, CO.  Among other things, his responsibilities include portfolio management, formulating investment strategy, and development of financial models for use by the firm. Throughout his career Mr. Rosenberg has developed financial models for numerous large and small companies across multiple asset classes/sectors, investment vehicles, and asset types.

Prior to founding RoseCap, Mr. Rosenberg was Managing Director with Jackson Oats Shaw Corporate Real Estate, a privately held real estate firm in Atlanta, GA. Mr. Rosenberg also previously served as Vice President/AE with General Electric ‘s Commercial Finance Division. He started his career in investment banking, underwriting and syndicating leveraged loans and high yield bonds for Wachovia Securities in Charlotte, NC.

Mr. Rosenberg received his Masters degree in Accounting and Bachelor of Business Administration from The University of Texas, at Austin, where he was also a member of the 2002 National Championship baseball team. He enjoys reading and competing in numerous sports, and also serves as a lecturer of finance, investments, and accounting for Colorado Mesa University, in Grand Junction, CO.

» Register now (FREE)
» View archived webcasts

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Free Webcast this Thursday: “Good Practices and Common Mistakes”

Join us this Thursday, December 6, 2012, for a free live webcast entitled, "Good Practices and Common Mistakes" to be presented by Dr. Huybert Groenendaal. This was one of the favorite sessions last month at the Palisade Risk Conference in Las Vegas.

Ever question if your Monte Carlo model is correct? Ever wondered how other organizations use @RISK, how to get the most value out of @RISK, and what are some of the most important best practices? Then this is the right free live webcast for you!

An increasing number of organizations are using analytical techniques such as quantitative risk analysis, value at risk (VaR), and risked NPV to help them improve decision making. However, all too often, these techniques may not be used optimally or accurately and their full value may not be realized.

During this presentation, Dr. Huybert Groenendaal will share his hands-on experience through hundreds of projects, and will discuss the following topics:

  1. Good practices for the use of @RISK and risk modeling to support decision-making
  2. Common mistakes in Monte Carlo simulation and how to prevent them.

All good practices and common mistakes will be discussed with the use of real-life risk modeling case studies and models based on EpiX consulting work.

Dr. Huybert Groenendaal is a managing partner at EpiX Analytics, a consultancy that helps clients use Monte Carlo simulation and probabilistic modeling in a broad range of industries and fields, ranging from financial risk analysis, business development, marketing, budgeting, inventory optimization, and pricing, to risk analysis in health. Dr. Groenendaal has extensive experience in risk modeling and analysis for business development, financial valuation, R&D portfolios and portfolio evaluations in pharmaceuticals and medical devices. Dr. Groenendaal also teaches a variety of risk analysis training courses including Financial Risk Modeling for Pharmaceuticals, Quantitative Risk Analysis, and Corporate Finance Risk Analysis and customized on-site courses. He also lectures on the use of risks modeling in business at the executive MBA program at the Leeds School of Business, University of Colorado and teaches two online risk analysis courses at Statistics.com. Dr. Groenendaal has an MBA in Finance from the Wharton School of Business and PhD from Wageningen University and is an adjunct faculty at Colorado State University.

» View the recorded webcast "Good Practices and Common Mistakes"
» View webcast archive

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Free Webcast this Thursday: “Multi-Dimensional Project Portfolio Optimization and @RISK”

Join us this Thursday, April 26, 2012, for a free live webcast entitled, "Multi-Dimensional Project Portfolio Optimization and @RISK" to be presented by Eric Torkia.

Many speak of organizational alignment, but how many tell you how to do it? Others present only the financial aspects of portfolio optimization but abstract from how this enables the organization to meets its business objectives.  We are going to present a practical method that enables organizations to quickly build and optimize a portfolio of initiatives based on multiple quantitative and qualitative dimensions: Revenue Potential, Value of Information, Financial & Operational Viability and Strategic Fit.
         
This free live webcast is going to present these approaches and how they can be combined to improve both tactical and strategic decision making. We will also cover how this approach can dramatically improve organizational focus and overall business performance.

We will discuss these topics as well as present practical models and applications using @RISK.

Discussion Topics

  •     Optimization Basics
    • Typical Optimization Applications
    • What is non-linear stochastic optimization
    • Objectives and constraints - things to know about optimization
  •     Quick Overview of Portfolio Theory
    • Overview of conventional portfolio methods (financial, strategic, IT...).
    • Markowitz and the efficient frontier
    • Viability/Fit method
  •     Optimizing with value of information and other critical dimensions
    • What is value of information (VOI)
    • How can VOI and portfolio methods be used to improve decision-making
    • How does the VOI impact portfolio decisions
  •     Building and running the model
    • Overview of the components of the portfolio model
    • Run a quick optimizations using different dimensions and discuss results
    • Questions and Answer Period


Eric Torkia MASc is a senior management consultant/trainer and business analyst.  He has collaborated with some of the world's most recognized organizations to ensure the optimal design and delivery of enterprise systems, analytics as well as new forecasting and decision making processes.

Eric combines a unique set of skills and competencies revolving around performance, risk and change management to bring about durable business performance improvements.

  • Financial and project based valuations
  • Project Risk Analysis on 1+ billion dollar projects
  • Performance Management business analysis and consulting
  • Spreadsheet Modeling and VBA automation for simulation, forecasting and optimization
  • Change Management consulting and training and instructional design relating to the adoption and implementation of enterprise analytics

Eric’s academic background includes a Master’s degree in information systems management from the University of Québec in Montreal as well as a BBA in international marketing and management from Northwood University Florida.

» Register now (FREE)
» View archived webcasts

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2011 Risk Conferences Series: Amsterdam, Mexico City, Rio de Jaineiro, Sydney, and Las Vegas

“Another great conference - well done! It's always a stimulating and thought-provoking
experience, and great hospitality.” - Michael Brand, Captum Capital

Over 100 delegates attended the 2011 Palisade Risk Conference at the historic West Indische Huise in Amsterdam in March. Over the course of the two day conference, industry experts presented a selection of real-world case studies about innovative and interesting approaches to risk and decision analysis. This event included the ever-popular workshops and training given by Palisade consultants, as well as a sneak peek at what is in the pipeline of new software from Palisade.

We invite you to join us next week in Mexico City, June 1 -2. Delegates from Consultoría en Decisiones®, PEMEX, IMP and experts from other companies and universities will present case studies and discuss Monte Carlo techniques and risk in all its forms.

Palisade Risk Conferences showcase the latest methodologies for risk analysis and decision making under uncertainty. It is an opportunity to learn applications such as product pricing, production forecasting, cost estimation, risk quantification, portfolio risk management, environmental liability estimation, project management, and much more, while utilizing the user-friendly risk simulation software of @RISK and the DecisionTools Suite. These events are attended by professionals from industries as diverse as oil and gas, pharmaceuticals, insurance, healthcare, engineering, and banking.

Be sure to join us for a stimulating and thought provoking experience at one of our remaining 2011 Risk Conferences in Rio de Janeiro, Sydney or Las Vegas!

» 2011 Rio de Janeiro Conference
» 2011 Sydney Conference
» 2011 Las Vegas Conference
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The Flash Crash

Last May 6, the Dow Jones Industrial Average made a rapid series of inexplicable drops, and, in fact, in one five-minute period fell more than 500 points.  Then, just as inexplicably, the market recovered.  The causes of the so-called Flash Crash remained mysterious until September, when the SEC issued a report on the rapid fluctuation of the market.  It found that a single "large fundamental trader" had used an algorithm to aggressively hedge its market position quickly.
 
Since then the role of neural networks and algorithms in automated transactions has received a good deal of attention from the media.  The online edition of this month's Wired offers a fascinating perspective on algorithms as investors.  It reveals how neural networks and other automated types of statistical analysis  can chew through news of the financial markets--essential a big pile of data-- to instantaneously produce a financial risk analysis, make a larger determination of the results of a prospective trade portfolio risk management terms, and make the trade.  The speed with which a computer can function as an investor is part of the problem. It produces a kind of feedback loop in which each instantaneous trade produces instantaneous responses from other computers trolling the markets. 
 
The trend toward computer control of financial markets, however, does not continue unfettered. The month after the Flash Crash, the SEC instituted some "circuit breakers," rules to stop trading when the feedback loops begun too intense and the markets fluctuate too rapidly.

All of this presents an interesting and larger question: How much control can we delegate to computers--not just in the financial realm but in our social and creative lives--before we have to scramble to catch up with them and regain control?   
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Two Shapes of Bond Risk

Baby Boomers are coming face to face with the realities of retirement, and their financial advisers are having to dig deep to come up with strategies that will calm their fears of a recurrence of the financial meltdown of 2008.  In this climate, one term that comes up repeatedly is fixed income, which usually means bonds.  Here, it is interesting to note that even fixed is not as certain as it sounds.  Prices and rates of return for bonds vary over time and in opposition to those of equities.  Even given this dynamic, the challenge for bond fund managers is essentially the same as for equity fund managers--how to diversify a portfolio's holdings to minimize risk and optimize return.  

In 2008 and early 2009 the the credit risk of corporate bonds was painfully in evidence, and since then financial planners have been sharpening their credit risk management tools to stabilize returns on bond portfolios.  It has been generally accepted by investment professionals that the greater the number of financial instruments in a portfolio, the broader the spread of credit risk.  A recent credit risk analysis by the BondDesk Group found, however, that spreading risk over an increasing number of investments is effective only up to a point, after which further investments offer no further protection against loss.
 
The BondDesk Group used Monte Carlo simulation software to determine two values, tail risk (loss of 20%) and black swan risk (loss at a catastrophic level of 50% or more), in portfolios that progressively increased in size from 2 to 50 bonds. Taken together the two measures of risk predicted which bonds would default.  Interestingly, the simulations revealed that both kinds of risk were reduced by increases in portfolio sizes up to 10 bonds, and in both cases, these benefits began to diminish with bond number 11.  
 
The group's credit risk analysis brings good news for both investment advisors--it simplifies their work--and investors--it reduces the cost of investing!  For the juicy details, go to the BondDesk website.
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The Great Moderation and Tail Risk

The so-called Great Moderation, the economic period that began in the late 1980s and ended with the financial crisis of 2007, was characterized by less volatility and more stability and predictability in the financial markets. I recently saw commentary that identified one of the causes of the economy's' plunge from moderation to recession as "Monte Carlo simulation" and the projections it produced.
 
Over time and a few blog entries it became apparent that what should have come under fire was not Monte Carlo as a statistical technique but the probability distributions on which the financial risk analysis models were based.  During the Great Moderation, apparently, many financial analysts involved in portfolio risk management relied on "normal" probability distributions and continued to rely on them even after tail risk events--events in which risk exceeded 3 standard deviations away from an asset's current price--began to occur much more frequently than "normal" accounted for.  This, of course, meant that actual investment returns were far from those predicted by the models.
 
Commenting on recession-proofing and tail risk, PIMCO's Richard H. Clarida observes that as we begin to leave the recession behind we are entering a period in which the New Normal is the paradigm distribution function for asset management.  The New Normal "is flatter and the tails are fatter."  As he sees it the long reach of risk has just gotten longer.  I recommend his essay, which stresses how important it is to "get the tails right."

Distributions aren't cast in concrete, and many Monte Carlo software packages allow you to fit the distribution to the demands of the questions you're addressing with your risk analysis model.  If you find  yourself in agreement with the New Normal, it shouldn't be that hard to get the tails right.    
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Free Webcast This Thursday: The Use of the DecisionTools Suite in Biotechnology Project and Portfolio Decision Making

Vertex Pharmaceuticals, Inc. is a global biotechnology company based out of Cambridge, MA. The Company's strategy is to commercialize its products both independently and in collaboration with major pharmaceutical companies. Vertex's product pipeline is focused on viral diseases, cystic fibrosis, inflammation, autoimmune diseases, cancer, and pain.

Given the uncertainty of outcomes in the biotech industry, consideration of variability is an inherent part of the decision process. Often, the mean (average) is not a relevant decision criteria. This is especially true for smaller biotech companies like Vertex – the opportunity costs are extremely high because scarce capital resources would be invested elsewhere, with a higher probability of realistic return. For example, a company may reject a project which is profitable on average (positive Net Present Value) because some of the possible outcomes are unacceptable to the decision maker. Consideration of variability allows a decision maker to bring in their own risk tolerance into the decision. A similar argument applies when estimating a safety margin above a base case (e.g. in cost budgeting).

Vertex’s strategy and analytics group within the corporate finance division seeks to provide the senior management with dynamic revenue and profit forecasting methodology that helps to identify types of drugs that should be developed given a finite amount of cash and resources. A traditional financial view allows the user to identify scenarios and potential outcomes, but lacks the ability to show the range of potential values within each and every outcome. Vertex’s team uses the DecisonTools Suite to establish the average outcome, the variability of outcomes and to pressure-test risk and uncertainty of a particular scenario throughout the decision process.

Vertex’s team built a complex financial risk analysis model using @RISK to enhance its portfolio process. Monte Carlo simulation and optimization are used to analyze and optimize project and portfolio decisions, given short and long-term corporate strategy. @RISK is also frequently used throughout the business development process: simulating across multiple sales forecasts provides BD team with a range of potential outcomes, making it easy to pinpoint a particular scenario on a curve, along with its probability and value. TopRank turns the sensitivity analysis into a quick and seamless exercise, answering multiple what-if questions within minutes. Franchise and program leaders can now see a dollar effect of their program being delayed or advanced, adding supplementary indications to the development plan and even addressing the price uncertainties all at the same time. The simple interface of PrecisionTree along with tornado chart outputs makes it easy to explain the effect and importance of a particular assumption / decision to an audience with no finance background.

As the company continues to grow, adding more drugs and collaborations to its development pipeline, we will see in this free live webcast how the DecisionsTools Suite remains one of Vertex’s analytical tools of choice to enhance and guide the decision making process.

» Register now (FREE)
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Tackling the energy crisis by managing demand, using risk modeling software

One of the side-effects of the recession appeared to be a reduction in the demand for electricity as businesses and consumers alike looked to make savings on their outgoings. However, economic recovery seems to render this trend as temporary, meaning that the global need to tackle energy-consumption is as pressing as ever.

BC Hydro, Canada's third largest electrical utility provides an interesting case study in how to  ascertain the most effective ways to tackle the gap between supply and demand of electricity in British Columbia. Trends such as an expanding population growth, and the increase in energy usage per customer, have led to a rise in the demand for electricity across the region. By legislation, BC Hydro must aim to meet these energy needs through implementing cost-effective energy conservation approaches before it can turn to increasing the supply. 

The company has set itself one of the most aggressive targets in North America, with a plan to meet almost 75 percent of its incremental load through Demand Side Management (DSM) over the next 20 years. DSM projects include compact fluorescent light promotions; subsidies for energy efficient appliances; variable speed motor promotions (for home furnaces); and promotional activity aimed at motivating customers to use less energy.

BC Hydro uses @RISK risk analysis software to measure the uncertainty around its energy conservation efforts, both at the project stage and at a higher portfolio level. Around 60 projects were analysed on a case-by-case basis, and a probability distribution around the forecast outcome was developed. @RISK helps BC Hydro to capture the level of uncertainty of the estimated savings for each individual DSM venture.

In recognition that projects do not operate in isolation, BC Hydro also uses @RISK to explore the interrelationships between key uncertainties: the participation and savings per participant, and the participation across projects. The analysis showed that if a 'conservation culture' was developed in the province, it would result in an increase in energy savings across all programmes. However, it also illustrated that, if this culture failed to materialise, the performance of all programmes will be dragged down.

Exploring uncertainty using @RISK allowed BC Hydro to find the best balance between the uncertainties of supply side resources and those of relying heavily on energy conservation. Employing Decision Making Under Uncertainty helps BC Hydro to meet both financial risk analysis and environmental risk analysis goals. As a result, it expects to meet the majority of its incremental load growth through conservation measures.

» Read the BC Hydro case study

Craig Ferri
EMEA Managing Director of Risk & Decision Analysis
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