The document discusses efficient frontier analysis and its uses in strategic risk management. It explains that efficient frontier analysis uses modern portfolio theory to help organizations optimize their risk portfolios by finding the combination of risks that provides the highest expected return for a given level of risk. This allows organizations to make better decisions about managing and insuring different types of risks. The document also provides a sample case study showing how efficient frontier analysis can be applied to evaluate different options for managing earthquake exposure, workers' compensation insurance, and general liability insurance risks.

1. Discussion1
Explaining the results of Efficient Frontier Analysis to non-
technical decision-makers
The implementation of Efficient Frontier Analysis in an
organization helps the process of strategic risk management to
encompass and advanced analytical technique. The outcomes
derived from it can easily be acknowledged and utilised by the
non-technical decision-makers of the organisation as well. With
the private utilization of Efficient Frontier Analysis, the
decision-maker can easily consider identifying Complex
property and developing casualty risk profiles. It has been
observed in the considered case study that the most convincing
organizational decision-making practices to determine efficient
risk management need extensive acknowledgement of the
governance structure followed by the processes and the varieties
of tools used in it. In addition to it, they are also subjected to be
developed on the basis of the guidance and principles of ISO
31000 followed by the guidance of implementation empowered
by Australian and New Zealand handbook HB 436 (Fraser,
Simkins & Narvaez, 2014). The consideration of Efficient
Frontier Analysis emphasizes the hierarchical roles within an
internal audit function as well as the organization and risk
management function.
The results of implementing Efficient Frontier Analysis depend
in-depth assessment of the risk portfolio volatility followed by
the pricing structure acknowledged through decision-making.
Furthermore, the considered case study also explains that the
implementation of Efficient Frontier Analysis also needs to
analyze the insurance layering efficiency to determine the risk
portfolio application in order to ensure the catastrophic loss
potential within the decision-making practices of strategic risk
management (Rezaeiani & Foroughi, 2018). Additionally, a
business organization implementing it can also become capable
of analyzing and resolving the control break down easily with

2. the identification of risk origins, actors, causes and
consequences precisely. With the help of proper strategic
management, the non-technical decision-making practices can
be functional through a risk appetite framework that influences
risk control framework. both these further impact on the
emergence of the dynamic risks followed by integrated
enterprise risk profile and scenario and stress testing by
enabling untapped opportunities.
Recommendations assuming the risk appetite
The notion of risk appetite is strongly aligned with risk
tolerance to influence the scenario and stress testing abilities to
develop an analytical framework. The fundamental purpose of
this Framework is to drive multiple sets of discussions based on
analytical information to help the decision-makers in
determining the risk profile and lead the organization to
constitute competitive opportunities. It has been observed that
the risk appetite in association with the risk tolerance helps
them in categorizing the risks and further reframe them as
opportunities (Zhou & Xu, 2016). The decision-makers are
recommended to acknowledge this concern in order to determine
the position control framework.
Identifying risk appetite also enables control actions for the
decision-makers considering the components of market share,
product or service provision, market profit, social impact,
stakeholder levels and other benefits (Hillson & Murray-
Webster, 2017). The decision-makers are also recommended to
acknowledge SRM over the traditional risk assessment in order
to two distinct advantages risk profiles from the exploitable
with a profile in order to determine sustainable efficiency and
preventing competitively noisy environment by foreseeing the
risk dynamics categorically through risk appetite.
Discussion2
For an organization to access risk versus return of each
proposed project, their project lead should use the concept of
efficient frontier analysis. If the frontier analysis is used

3. efficiently, a company can easily understand and find the high
profitable project to invest in. In addition, the information,
which is gathered during this process, can be used to develop
decision structure, which is eventually used by the project
managers to assess a project. As per (Fraser, 2014), the idea of
using the idea of using the concept of efficient frontier analysis
is to help investors to invest in a project that gives high returns
against risks. This process is usually represented by a graph.
The value on the X-Axis of the graph is risk and the value on
the Y-Axis of the graph is investment returns. A line is drawn
to connect the highest portfolio return that a project can give
with the existing risks factors. This line is the efficient frontier
line and the analysis.
I would prefer using a simple graph, so that a non-technical
person can easily understand the point. Additionally, this is a
simple approach too, not all the points that fall under the
efficient frontier line is optimal, therefore making it a not-a-
good-idea-to-implement kind of project. Further, dumping a
bunch of statics and random facts is going to be less
fascinating to a non-techie.
The first and foremost recommendation from my end is, making
sure the information is well recorded in the graph, so that we
can obtain accurate information. If not, the main purpose of the
analysis will never be achieved.
Discussion3
Most investment choices involve the trade-off between risk and
reward. The “Efficient frontier” is a modern portfolio theory
tool that shows investors the best possible return they can
expect from their portfolio, given the level of volatility they are
willing to accept. The chart here demonstrates the influence of
concept. The vertical axis represents the expected rate of return.
The horizontal axis signifies the investors’ risk tolerance. The
frontier is a line curve, which shows the potential yield of
portfolio given a degree of risk. Optimal portfolios should lie
on this curve. In addition, the portfolios that fall below the

4. frontier curve represent the less ideal mix of investment because
with the same risk one could achieve a greater return. Any
portfolio above this curve is impossible.
Take Chris who owns portfolio A. Currently, his investment
generates the combined yield of 8%. Based on the efficient
frontier, however, Chris can be achieving the same level of
return with a considerably safer mix of investments with
portfolio B. Both portfolio offer the same level of return but
portfolio B has less risk. The job of investment advisor who
uses modern portfolio theory is to identify the basket of
securities that get as close as possible to the frontier. Investors
should realize there is no preferred point on the frontier. A
young professional probably is willing to accept a high level of
risk and will therefore want to be somewhere near to the right
of the curve. For an older adult, nearing retirement, a portfolio
further to the left maybe ideal.
What is important is to get as close as possible to the efficient
frontier whatever your risk profile may be. The effort to take
advantage of complex data techniques was, in part, stimulated
by the evolving risk management framework integration into
what is now being modestly referred to as enterprise risk
management (ERM) or strategic risk management (SRM).
Within the 2013 Risk and Insurance Management Society
(RIMS) SRM Implementation Guide, the concept of strategic
risk management is defined as a "business discipline that drives
the deliberations and actions surrounding business- related
uncertainties, while uncovering untapped opportunities reflected
in an organization's strategy and execution."
What distinguishes this definition from previous descriptions of
enterprise wide risk management (ERM) approaches is the effort
to sustainably deliver a robust fact-based strategic dialogue
across the entire organization. This new strategic dialogue
requires an analytical framework that is dynamic and
encompasses all areas of an enterprise. In this chapter, we
demonstrate how the use of efficient frontier analysis (EFA),
and many of its derivative techniques, provides a robust

5. portfolio approach to hazard, operational, market, and
reputational risk domains.
ITS 835
Chapter 22
JAA Inc. – A Case Study in Creating Value from Uncertainty
Enterprise Risk Management
Dr. Mike Peterson
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

6. • 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

7. • 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

8. ITS 835
Chapter 25
Uses of Efficient Frontier Analysis in Strategic Risk
Management
Enterprise Risk Management
Dr. Mike Peterson
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

9. 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

10. • 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