Risk Flashcards
Decision-Making Under Uncertainty
Risk analysis
Risk diversification and management
Risk analysis
How to identify, analyze, and interpret the expected variability in project outcomes using:
Sensitivity Testing
Scenario Analysis
Monte Carlo Simulation
Risk diversification and management
How to diversify unsystematic risk
How to redesign and reorganize projects in order to reallocate risk
Sensitivity analysis is designed to take the probability of occurrence of several events into account to quantify the risks associated with the project outcomes.
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“What if” analysis: Test the sensitivity of a project’s outcome (NPV or the key variable) to changes in value of one parameter at a time
Risk analysis will help the project in diversifying all kinds of risks including macroeconomic related risks.
F 1- Risk Analysis How to identify, analyze, and interpret the expected variability in project outcomes using: ScenarioSensitivity Testing Analysis Monte Carlo Simulation
2-Risk diversification and management
How to diversify unsystematic risk
How to redesign and reorganize projects in order to reallocate risk
The level of uncertainty can be determined by the effect of each variable on the final outcomes
of the project.
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Each variable affecting NPV is subject to a high level of uncertainty
The larger the size of the sample and the greater the variability of past events will increase the accuracy of cash flow projections.
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1- How similar past events are to the object of forecast
2- How big is the sample of past events
3- How recent are past events
4- How consistent the outcome historically
4- How far into the future is the forecast
5- How dependent the outcome is on previous years (trend) and on other projected variables (correlations)
Sensitivity analysis is used to measure the sensitivity of the debt service ratios to the changes
of at least one variable at a time
What if” analysis: Test the sensitivity of a project’s outcome (NPV or the key variable) to changes in value of one parameter at a time
The major shortfall of the sensitivity analysis is that it cannot examine the effect of changes in one variable from different points of view
One at the time testing is not realistic because of correlation among variables.
The importance of the variables used in scenario analysis is mainly determined by their share of
the total benefits as well as the range of its values which will help to determine the direction of
the change in the project outcomes.
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it happens in the sensitivity analysis method
Regardless of the risk variables, sensitivity analysis is useful in determining the direction of change in each risk variable.
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The results of probability distribution obtained from a scenario analysis can be used by decision-makers
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first examining the range of possible outcomes by a Monte Carlo Analysis.
Unlike the probabilistic models, deterministic models take into account the correlation between different risk variables
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