Finance

Presenting Simulation Results

Presenting the results of a Monte Carlo simulation can be challenging when your audience isn’t inclined to receive probabilistic information.  Decision makers often want a single number for net present value, project completion date, or profit. How do we as the modeler/analyst present this information so it is understood and appreciated for the extra information …

Decision Making Under Risk and Uncertainty

Decision making under risk and uncertainty is a fact of life.  There are many ways of handling unknowns when making a decision.  We will try to enumerate the most common methods used to get information prior to decision making under risk and uncertainty.  We’ll also look at decision rules used to make the final choice.  For …

Evaluating an R&D Project with a Decision Tree

Decision trees are useful for projects that proceed in stages where investment decisions may change over time.  In this application brief, we will use decision tree analysis to evaluate a research and development project where we are uncertain if a commercial product can be produced as a result of the research portion of the project. …

Understanding The Meaning of Risk

Risks are everywhere. It’s a wonder that anyone leaves their house each morning to venture into the world, or to venture into projects and investments.  In this article we will look at the meaning of risk. There are many definitions of risk depending on the context, or industry.  Also, risk is frequently used as a …

Determining Value at Risk Using Monte Carlo Simulation

Value at risk (VaR) is a commonly used risk measure in the finance industry.  Monte Carlo simulation is one of the methods that can be used to determine VaR. There are two things we need to specify when stating value at risk: The time horizon.  This may be daily for some portfolios or a longer …

Expected Shortfall Using Monte Carlo Simulation

Expected shortfall is an extension of value at risk (VaR).  For a discussion on VaR, refer to the article where VaR is determined using Monte Carlo simulation.  Expected shortfall is also known as conditional VaR. Suppose we have determined VaR for our portfolio.  Let’s say we have a VaR for monthly returns at 95% confidence …