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Chapter 25
Uses of Efficient Frontier Analysis in Strategic Risk
Management
Introduction
Strategic risk management framework
Modern portfolio theory
Practical application of risk measurement for insurance
Case study
Intended uses
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 Framework
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
E(Rp)∑wi E(Ri )
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 the
occurrence of an event
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
Best fit
Established ERM
Running Head: TITLE OF PAPER IN CAPITAL LETTERS 1
Title of Paper in Capital Letters
Submitted by
Name of Student
El Centro College
Class, Section, Term
Word Count:
TITLE OF PAPER IN CAPITAL LETTERS 2
Title of Paper in Upper and Lower Case Letters
Start typing your paper here. Make sure to indent each
paragraph and use double spacing for the text of the paper. The
correct margins and fonts are already set up for you! As you
type, the References page will always make itself your last
page. You don’t have to do anything for this to happen! Here is
how you cite your source in-text using APA format, and
remember each paragraph has to have a citation at the end
showing where you located your data. Use the other links your
instructor provided in the course syllabus for different sources.
But they all follow the same basic format of parenthesis then
author then year of publication then page numbers then
parenthesis then period. Here is an example for citing one book:
Just as Sherlock Holmes investigates a case, psychologists must
evaluate all the available data before making a deduction, lest
they jump to an erroneous conclusion on the basis of
insufficient evidence (Bram & Peebles, 2014, pp. 32–33).
T
References
Bram, W.C., and Peebles, William J. (2014). Sherlock Holmes
and the truth about history. Washington, DC: American
Psychological Association.
FINAL RESEARCH PAPER RUBRIC
Dr. Moralez
2019
The purpose of the Rubric is to provide students with clear
guidelines about how your instructor
will evaluate your final research paper.
1. Thesis and APA Format: ______/35
Does the final draft have a clear, unambiguous thesis? Does it
follow APA format
for citations? Are page numbers from citations included? Are
there transitions
between sections? Is there a conclusion? Is the grammar and
spelling correct?
2. Primary Source: ______/10
Source must be integrated into overall argument; merely
mentioning it once is not
sufficient.
3. Scholarly book: ______/10
Source must be integrated into overall argument; merely
mentioning it once is not
sufficient.
4. Scholarly Journal Article: ______/10
Source must be integrated into overall argument; merely
mentioning it once is not
sufficient.
5. Encyclopedia Entry with Author: ______/10
Source must be integrated into overall argument; merely
mentioning it once is not
sufficient.
6. Word Count: ______/10
The paper must be 1400-1650 words, with word count on title
page.
7. References Page: ______/10
Must follow APA template provided by instructor.
8. Title Page: ______/5
Must follow APA template provided by instructor. Must list
total word count.
9. Final Total: ______/100
Final Grade:
Chapter22
JAA Inc. – A Case Study in Creating Value from Uncertainty
Introduction
Business Background
Initial Steps
Evolution of Risk Management
Introduction of ISO 31000 and HB 436
Bringing Everything Together
Background
JSS is a clothing wholesaler and retailer
Founded in 1972
Went public in 1998
It has three operating segments:
US wholesale
US retail
International (both wholesale and retail)
It has 57 retail stores in 10 countries
Initial Steps
Strategic objectives
Maintain market leadership
Sustain technology leadership
Strengthen global presence
Deliver quality service
Become a leader in compliance with laws and regulations
Establish a governance system
Multiple committees with specific responsibilities
Governance and framework
Executive Risk Oversight
Responsible for managing risk and implementing internal
controls
Internal Audit
Risk Management
Compliance Monitoring
Board & Board
Committees
Executive
Functions
Control
Functions
Business
Functions
Main Board
Risk and Strategy Committee
Audit Committee
Compensation and Nomination Committee
Evolution of Risk Management
Lack of strategic risk management led to many issues
Communication
Missed opportunities
Lack of commitment to objectives
Poor quality
Identified gaps in risk management
Engaged in aggressive internal training
Soft skills
Team building
Management planning
Introduction to ISO 31000 and HB 436
JAA adopted ISO 31000
HB 436 provided extensive implementation guidance
ISO 31000 was an upgrade of the framework JAA was using
ISO 31000 framework formalized ERM of JAA
Defined organization and process
Using Context of Risk Criteria
Bringing Everything Together
Risk Map
Risk Attitude

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Chapter 25Uses of Efficient Frontier Analysis in Strategic.docx

  • 1. Chapter 25 Uses of Efficient Frontier Analysis in Strategic Risk Management Introduction Strategic risk management framework Modern portfolio theory Practical application of risk measurement for insurance Case study Intended uses 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 Framework Strategic Risk Management
  • 2. 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 E(Rp)∑wi E(Ri ) 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 the occurrence of an event Case Study Three basic risks Earthquake exposure to buildings Workers’ compensation insurance General liability insurance Portfolio Options Earthquake Options
  • 3. Workers’ Compensation Options General Liability Options Combined Portfolio Options Intended Uses Help large organizations Risk management Portfolio management Insurance and non-insurance Best fit Established ERM Running Head: TITLE OF PAPER IN CAPITAL LETTERS 1 Title of Paper in Capital Letters Submitted by Name of Student El Centro College Class, Section, Term Word Count:
  • 4. TITLE OF PAPER IN CAPITAL LETTERS 2 Title of Paper in Upper and Lower Case Letters Start typing your paper here. Make sure to indent each paragraph and use double spacing for the text of the paper. The correct margins and fonts are already set up for you! As you type, the References page will always make itself your last page. You don’t have to do anything for this to happen! Here is how you cite your source in-text using APA format, and remember each paragraph has to have a citation at the end showing where you located your data. Use the other links your instructor provided in the course syllabus for different sources. But they all follow the same basic format of parenthesis then author then year of publication then page numbers then parenthesis then period. Here is an example for citing one book: Just as Sherlock Holmes investigates a case, psychologists must evaluate all the available data before making a deduction, lest they jump to an erroneous conclusion on the basis of insufficient evidence (Bram & Peebles, 2014, pp. 32–33). T References Bram, W.C., and Peebles, William J. (2014). Sherlock Holmes
  • 5. and the truth about history. Washington, DC: American Psychological Association. FINAL RESEARCH PAPER RUBRIC Dr. Moralez 2019 The purpose of the Rubric is to provide students with clear guidelines about how your instructor will evaluate your final research paper. 1. Thesis and APA Format: ______/35 Does the final draft have a clear, unambiguous thesis? Does it follow APA format for citations? Are page numbers from citations included? Are there transitions between sections? Is there a conclusion? Is the grammar and spelling correct? 2. Primary Source: ______/10 Source must be integrated into overall argument; merely mentioning it once is not
  • 6. sufficient. 3. Scholarly book: ______/10 Source must be integrated into overall argument; merely mentioning it once is not sufficient. 4. Scholarly Journal Article: ______/10 Source must be integrated into overall argument; merely mentioning it once is not sufficient. 5. Encyclopedia Entry with Author: ______/10 Source must be integrated into overall argument; merely mentioning it once is not sufficient. 6. Word Count: ______/10 The paper must be 1400-1650 words, with word count on title page. 7. References Page: ______/10 Must follow APA template provided by instructor.
  • 7. 8. Title Page: ______/5 Must follow APA template provided by instructor. Must list total word count. 9. Final Total: ______/100 Final Grade: Chapter22 JAA Inc. – A Case Study in Creating Value from Uncertainty Introduction Business Background Initial Steps Evolution of Risk Management Introduction of ISO 31000 and HB 436 Bringing Everything Together Background JSS is a clothing wholesaler and retailer Founded in 1972 Went public in 1998 It has three operating segments:
  • 8. US wholesale US retail International (both wholesale and retail) It has 57 retail stores in 10 countries Initial Steps Strategic objectives Maintain market leadership Sustain technology leadership Strengthen global presence Deliver quality service Become a leader in compliance with laws and regulations Establish a governance system Multiple committees with specific responsibilities Governance and framework Executive Risk Oversight Responsible for managing risk and implementing internal controls Internal Audit Risk Management Compliance Monitoring Board & Board Committees Executive Functions Control Functions Business
  • 9. Functions Main Board Risk and Strategy Committee Audit Committee Compensation and Nomination Committee Evolution of Risk Management Lack of strategic risk management led to many issues Communication Missed opportunities Lack of commitment to objectives Poor quality Identified gaps in risk management Engaged in aggressive internal training Soft skills Team building Management planning Introduction to ISO 31000 and HB 436 JAA adopted ISO 31000 HB 436 provided extensive implementation guidance ISO 31000 was an upgrade of the framework JAA was using ISO 31000 framework formalized ERM of JAA Defined organization and process
  • 10. Using Context of Risk Criteria Bringing Everything Together Risk Map Risk Attitude