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Discussion- 1

1. How does efficient frontier analysis (EFA) differ from other forms of complex risk assessment techniques?
The issue of the selection of the risk management methods to support investment decision-making is one of the key issues discussed in the management of portfolios. The factor contributing to the development and dissemination of the risk management methods is the fact that the development of this theory, the risk of portfolios of financial institutions began to measure widely using the Markowitz portfolio selection model. Currently, this problem has been solved, since his designation used linear programming. It cannot be missed with these two facts. The indication of such a relationship, as well as its characteristics are the main purpose of the publication, in which there was not only used the study literature. The efficient frontier can be defined as the image of a set of portfolios that provide the maximum return for each level of risk or minimal risk for any level of return. In addition, this measure brings important details in the development area of portfolios’ management of financial instruments, on the grounds that it considers the possibility of the investor’s bankruptcy and may be regarded as a dynamic measurement of the risk (Bali T.G).
2. What limitations might an analyst encounter with EFA?
The financial equivalent of racing cars if They’re one of the most touted, yet most misunderstood and misused, tools in the field of financial planning. Understanding the nature of an efficient frontier model and the assumptions on which it relies. As with a sophisticated racing car, a powerful tool in the wrong hands can be a very dangerous thing. For example, it’s logical to believe that stocks will outperform bonds in the future. Efficient frontier models rely on historical data and relationships to generate the “perfect” portfolio. In my experience, many investors who use efficient frontier models are unaware of their pitfalls. These models are being marketed as solutions to the problem of portfolio construction, but they come without instructions.
3. How can efficient frontier analysis results be communicated and utilized with nonmathematical decision maker?
Communication is not a crank to be turned mindlessly, but a decision problem of its own. As we will see, there are many alternatives to consider. The analyst’s choices constitute the design of a communication plan. In ideal cases, the client is infinitely patient, unshakably invested in the problem, fully committed to finding the highest quality solutions, flexible about the process, and unwavering in confidence in the analyst’s work. In such cases, tight outlines or rambling jumbles may lead to the same outcome. Good quantitative analysis alone does not usually produce good decisions, because rarely does the analyst control all the resources required to decide and act. Decision makers and other players who influence the decision must assimilate the results of the analysis and integrate it with their knowledge of the situation, if they are to be prepared to act. if decision analysis is intended to facilitate a conversation, effective communication of results should ensure that concerns and knowledge are shared sufficiently for actors to move on to the next stage.

Discussion -2

RE: Chapter 25 – Uses of Efficient Frontier Analysis in Strategic Risk Management
COLLAPSE
How does efficient frontier analysis (EFA) differ from other forms of complex risk assessment techniques?
Efficient frontier analysis given for any risk it will give the highest level of expected outcome regardless of any combination of assets could be. It will analyze risk vs return on investment portfolio. The main difference I could bring out here from other risk assessment techniques is it gives highest level of portfolio and it considers financial values of the assets as a key to the analysis.

What limitations might an analyst encounter through the use of EFA?
The issues looked by analyst while utilizing efficient frontier analysis is misconception of the idea of a productive frontier model and the presumptions on which it depends. It is much the same as giving the incredible asset on an inappropriate hands. Effective frontier models depend on recorded information and connections to produce the “impeccable” portfolio. It treats contributing as a science as just a couple of negligible adjustments in the normal returns, standard deviations, and connections of a benefit portfolio will bring about drastically unique resource designation dependent on productive outskirts investigation. So we as a financial specialist can’t know ahead of time the precise levels for returns, connections, and standard deviations as accepted by an effective outskirts model. Expert need to put some limitation on resource portfolio to make it a successful model, for example, global resources not surpass 30 percent or 40 percent of the portfolio.
How can efficient frontier analysis results be communicated and utilized with nonmathematical decision makers?
For a decision to make communication is utmost important, even before communicating the analyst must consider the objectives of the decision makers and must design the communication. Communication should go smooth that all participants must be able to understand all the practical available information. A specific grid must be determined to focus on which areas need to be included and which areas to omit. Well documented models, e-communication and reports and most importantly slide presentations will be effective.

Discussion -3

RE: Chapter 22 PPT – JAA Inc.–A Case Study in Creating Value from Uncertainty
COLLAPSE
How high do you assess the knowledge level of the business strategy throughout the company by the average employee? Is it your assessment that there is a robust understanding of JAA’s business strategy? Support your position with examples.
Employees at JAA has a very good understanding and high level of knowledge. This is because
1. Management has included all the stakeholders in various communication channels like town hall meetings, conferences, and webinars. This specifically helped employees at various levels to understand the company’s strategy.
2. Several business functions were made responsible for managing risk.
3. Board has involved different committees (Comprehensive, Risk and strategy, EROC) by delegating work related to strategy, plans, policies, and regulations
4. Risk management framework was designed in such a way that guidance has been provided to address budgeting, planning, human resources, and information security
As you are aware, effective implementation of ISO 31000 involves effective design and implementation of a risk management framework and effective implementation of the risk management processes. This will be verified by incorporation of 11 key principles. Find an example in the case for each of the 11 principles in action.
1. JAA identified five strategic objectives tied with risk management criteria in order to focus on business value.
2. All business functions made responsible for managing risk and internal controls implementation.
3. Risk management was designed to help in effectively making business decisions
4. It explicitly addresses concerns with business performance, organizational system failures, and capital adequacy.
5. With the help of internal and external context and governance framework risk management structured effectively.
6. A lot of information was gathered from audits and internal data to define risk levels and identify the probability of risk occurrence.
7. Designed framework was tailormade to JAA and developed based on inputs from the risk management team
8. Human and cultural factors were considered by taking the feedback from employees and adjusting business as per the local needs in several countries.
9. All the stakeholders including internal and external were made aware of risk management procedures with help of policies and application projects thus making it transparent.
10. JAA wants to improve the risk governance framework by incorporating best practices from several countries like Canada, UK, and Australia.
11. Helped company to facilitate continuous improvements by achieving growth in the last 4 years
If you compare the internal audit department at JAA to several that you know of currently in the marketplace, what are some of the major differences that you see at JAA that obviously have contributed to superior performance? What is unique and refreshing about the approach to the external audit as compared to what you have seen in the industry?
One of the major difference that the internal audit team at JAA contributed was indicating the success of the company by aligning the accomplishments against the company’s objectives. The exclusive approach that external auditors followed was sending comprehensive letters to management to provide root cause analysis.

Discussion -4

How high do you assess the knowledge level of the business strategy throughout the company by the average employee? Is it your assessment that there is a robust understanding of JAA’s business strategy? Support your position with examples.
The JAA Inc. uses best available information at their disposal to make better decision and for communicating the organizational goals to it employees. This encourages employees to understand best business practices and allows them to identify threats and opportunities. To make risks more manageable the strategic objectives, tactical objectives and operational objectives were mapped and traced.
The HR team at JAA adopted a policy that allowed them to perform background checks and train new employees with risk management.
When JAA decided to adopt the governance framework, they have applied the principles of disciplines, transparency, independence and accountability that allowed business functions to follow governance throughout the company.
As you are aware, effective implementation of ISO 31000 involves effective design and implementation of a risk management framework and effective implementation of the risk management processes. This will be verified by incorporation of 11 key principles. Find an example in the case for each of the 11 principles in action.
JAA Inc. adopted the ISO 31000, which is a risk management framework and a process for managing risk. It can help enterprises increase the probability of achieving their targets, improves risk identification and management process, compare their risk management process with the benchmark, corporate governance and efficiently use the resources for risk mitigation. They provide guidance for internal and external audit programs within an organization. 11 principles of ISO 31000 are
a. Create Value: The risk management must be tied to objectives and must focus on business values to reach their targets. Attributes and values that cannot be measured directly may be expressed using qualitative descriptors rather than quantitative measures. Example – Human, social and ecological values that play key role on managing safety, security and compliance related risks.
b. Be an integral part of organizational decision making and processes: Risk management is not a standalone process, rather it is a part of all the organizational processes including strategic planning, internal projects and change management process.
c. Be a part of decision making: The risk management process helps decision makers with choices, priorities and to select the most appropriate action. Decision on strategic issues should consider environmental factors, changes in organization’s resources, human factors.
d. Explicitly address uncertainties: Risks can be assessed by understanding the nature and sources of the uncertainties. When assessing a risk, it is important to consider the uncertainties associated with it. They should never be underestimated or overestimated. Examples of uncertainties – Likelihood and consequences of risks.
e. Be systematic, structured and timely: A systematic and structured risk management helps an organization to achieve efficiency, consistency and reliable results. Example – usage of top-down or bottom-up approach to address the appropriate level of management.
f. Be based on the best information available: The historical data, experience, feedback, predictions and expert judgement are the inputs to the risk management process. The decision makers should provide accurate information and any absence would cause potential harm. One way to achieve this is through periodic reviews.
g. Be tailored to your business: The risk management should be tailored according to the needs of each organizations because they vary in culture, characteristics, risk criteria and operational contexts.
h. Take human and cultural factors into consideration: It is important that the employee capability, perceptions and culture are taken into account during the risk management process.
i. Be transparent and inclusive of all stakeholders: For the risk management process to be efficient, the involvement of stakeholders and decision makers is important at every level of the implementation. Implementation of this principle should also consider confidentiality, security and privacy within the organization.
j. Be dynamic, iterative and responsive to change: The risk changes with internal, external events such as internal restructuring, acquisitions, change in relevant law, securing a new contract, new knowledge and technologies, or changes in supplier. Hence any such decision making activity should be monitored, reviewed from time-to-time.
k. Facilitate continual improvement and enhancement of the organization: Improve risk management process through qualitative, quantitative indicators, feedbacks obtained from users, customers and stakeholders. The process should be
If you compare the internal audit department at JAA to several that you know of currently in the marketplace, what are some of the major differences that you see at JAA that obviously have contributed to superior performance? What is unique and refreshing about the approach to the external audit as compared to what you have seen in industry?
The internal audit department at JAA consists of high quality performers with strong academic and professional background. They were responsible for verifying if the ERF is operating affectively and provided required assurance. The department members actively designed the risk management framework, attended strategic planning process, evaluated risk management, carefully assigned roles and responsibilities, are much focused on the highest risks in the organization, comprehensive review of business or operational process, monitoring and reviewing new risks, and were dedicated to continuous improvement. Their performance was very consistent and were immensely dedicated to achieving the company’s strategic objectives. They report to the board members and its committee periodically.
However, the company missed few key areas during the external audit. So they invited external auditors to the strategic planning session and allowed the external audit department head to communicate with the internal audit team. They evaluated the existing risk management framework, processes and recommended organizational changes based on the Root Cause Analysis (RCA). They created risk management functions to ensure that all parties’ efforts were aligned clearly. The internal audit time was never consumed in performing external audit work to reduce cost of the external audit.