Applied risk analysis : moving beyond uncertainty in busines

Praise for Applied Risk Analysis
"Once again, Dr. Mun has created a 'must-have, must-read' book for anyone interested in the practical application of risk analysis. Other books speak in academic generalities, or focus on one area of risk application. Applied Risk Analysis gets to the heart of the matter with applications for every area of risk analysis. You have a real option to buy almost any book-you should exercise your option and get this one!"
-Glenn Kautt, MBA, CFP, EA, President and Chairman, Monitor Group, Inc.
"Johnathan Mun's book is a sparkling jewel in my finance library. Mun demonstrates a deep understanding of the underlying mathematical theory in his ability to reduce complex concepts to lucid explanations and applications. For this reason, he's my favorite writer in this field."
-Janet Tavakoli, President, Tavakoli Structured Finance, Inc. and author of Collateralized Debt Obligations & Structured Finance
"Every year the market of managerial books is flooded again and again. This book is different. It puts a valuable tool into the hands of corporate managers who are willing to stand up against uncertainties and risks and are determined to deliver value to shareholder and society, even in rough times. It is a book for the new generation of managers, for whom Corporate America is waiting."
-Dr. Markus Götz Junginger, Managing Partner
IBCOL Consulting AG (Switzerland)
"Dr. Mun breaks through the hyperbole and presents a clear step-by-step approach revealing to readers how quantitative methods and tools can truly make a difference. In short, he teaches you what's relevant and a 'must know.' I highly recommend this book, especially if you want to effectively incorporate the latest technologies into your decision making process for your real world business."
-Dr. Paul W. Finnegan, MD, MBA, Vice President, Commercial Operations and Development, Alexion Pharmaceuticals, Inc.
"A must read for product portfolio managers . . . it captures the risk exposure of strategic investments, and provides management with estimates of potential outcomes and options for risk mitigation."
-Rafael E. Gutierrez, Executive Director of Strategic Marketing and Planning, Seagate Technology
"Johnathan Mun has previously published a number of very popular books dealing with different aspects of risk analysis-associated techniques and tools. This last publication puts all the pieces together. The book is really unavoidable for any professional who wants to address risk evaluation following a logical, concrete and conclusive approach."
-Jean Louis Vaysse, Deputy Vice President Marketing, Airbus (France)

Author Notes

Dr. Johnathan Mun is Vice President of Analytics at Decisioneering, Inc.

Introduction	p. 1
Part 1 Risk Identification
Chapter 1 Beyond Uncertainty	p. 11
A Brief History of Risk: What Exactly Is Risk?	p. 11
Uncertainty Versus Risk	p. 12
Why Is Risk Important in Making Decisions?	p. 13
Dealing with Risk the Old Fashioned Way	p. 15
The Look and Feel of Risk and Uncertainty	p. 18
Five-Minute Industry Spotlight: ExperCorp	p. 21
Questions	p. 22
Part 2 Risk Evaluation
Chapter 2 From Risk to Riches	p. 25
Taming the Beast	p. 25
The Basics of Risk	p. 26
The Nature of Risk and Returns	p. 27
The Statistics of Risk	p. 28
The Measurements of Risk	p. 33
Five-Minute Industry Spotlight: Farmland	p. 35
Five-Minute Industry Spotlight: Environmental Protection Agency	p. 36
Questions	p. 37
Chapter 3 A Gentleman's Guide to Model Building	p. 38
Document the Model	p. 38
Separate Inputs, Calculations, and Results	p. 42
Protect the Models	p. 43
Make the Model User-Friendly: Data Validation and Alerts	p. 44
Track the Model	p. 46
Automate the Model with VBA	p. 46
Model Aesthetics and Conditional Formatting	p. 47
Appendix A Primer on VBA Modeling and Writing Macros	p. 48
Exercises	p. 57
Part 3 Risk Quantification
Chapter 4 On the Shores of Monaco	p. 61
What Is Monte Carlo Simulation?	p. 61
Why Are Simulations Important?	p. 62
Comparing Simulation with Traditional Analyses	p. 65
Using Crystal Ball and Excel to Perform Simulations	p. 70
Five-Minute Industry Spotlight: Colorado School of Mines	p. 73
Five-Minute Industry Spotlight: Hewlett-Packard	p. 75
Appendix Simulation	p. 76
Questions	p. 90
Chapter 5 Peering into the Crystal Ball	p. 91
The Basics of Crystal Ball Software	p. 91
Getting Started with Crystal Ball Software	p. 94
The Simulation Environment	p. 96
Creating a Simulation	p. 97
Interpreting the Simulation Results	p. 100
Five-Minute Industry Spotlight: TRW	p. 103
Five-Minute Industry Spotlight: DuPont Merck	p. 104
Questions	p. 105
Chapter 6 Pandora's Tool Box	p. 106
Tornado and Sensitivity Tools in Simulation	p. 106
Correlating and Fitting a Distribution Plus Precision Control	p. 112
Precision Control	p. 117
Bootstrap Simulation	p. 121
Two-Dimensional Simulation	p. 122
Decision Tables	p. 124
Five-Minute Industry Spotlight: 3M	p. 126
Five-Minute Industry Spotlight: Deloitte & Touche Consulting	p. 127
Appendix Goodness-of-Fit Tests	p. 128
Questions	p. 132
Part 4 Industry Applications
Chapter 7 Extended Business Cases I: From Pharma to Black Gold	p. 135
Case Study: Pharmaceutical and Biotech--High Precision Quantitative Deal Structuring in the Biotechnology and Pharmaceutical Industries	p. 135
Case Study: Oil and Gas Production and Exploration	p. 156
Five-Minute Industry Spotlight: Sierra Systems	p. 168
Five-Minute Industry Spotlight: Motorola	p. 170
Part 5 Risk Prediction
Chapter 8 Tomorrow's Forecast Today	p. 175
What Is Forecasting?	p. 175
The Nature and View of Forecasting	p. 176
Five-Minute Industry Spotlight: Hewlett-Packard	p. 182
Five-Minute Industry Spotlight: SunTrust Bank	p. 183
Questions	p. 183
Chapter 9 Using the Past to Predict the Future	p. 184
Time-Series Forecasting Methodology	p. 184
No Trend and No Seasonality	p. 185
With Trend But No Seasonality	p. 191
No Trend But With Seasonality	p. 195
With Seasonality and With Trend	p. 197
Regression Analysis	p. 201
The Pitfalls of Forecasting: Outliers, Nonlinearity, Multicollinearity, Heteroskedasticity, Autocorrelation, and Structural Breaks	p. 215
Other Technical Issues in Regression Analysis	p. 223
Introduction to Advanced Forecasting	p. 225
Appendix A Forecast Intervals	p. 226
Appendix B Ordinary Least Squares	p. 227
Appendix C Detecting and Fixing Heteroskedasticity	p. 230
Appendix D Detecting and Fixing Multicollinearity	p. 231
Appendix E Detecting and Fixing Autocorrelation	p. 233
Questions	p. 234
Exercise	p. 234
Part 6 Risk Diversification
Chapter 10 The Search for the Optimal Decision	p. 237
What Is an Optimization Model?	p. 237
The Traveling Financial Planner	p. 238
The Lingo of Optimization	p. 240
Solving Optimization Graphically and Using Excel's Solver	p. 243
Five-Minute Industry Spotlight: ProVise Management	p. 249
Five-Minute Industry Spotlight: Texaco	p. 251
Questions	p. 252
Chapter 11 Optimization under Uncertainty	p. 253
Project Selection Model (Discrete Optimization under Uncertainty)	p. 253
Portfolio Optimization Using Risk and Return (Continuous Stochastic Optimization)	p. 258
Five-Minute Industry Spotlight: Minnesota Power	p. 262
Question	p. 263
Exercise	p. 263
Part 7 Risk Mitigation
Chapter 12 What Is So Real About Real Options, and Why Are They Optional?	p. 267
What Is Real Options?	p. 267
The Real Options Solution in a Nutshell	p. 269
Issues to Consider	p. 269
Implementing Real Options Analysis	p. 271
Choosing the Right Real Options Analysis Tools	p. 272
Five-Minute Industry Spotlight: Boeing	p. 275
Questions	p. 277
Chapter 13 The Black Box Made Transparent: Real Options Analysis Toolkit	p. 278
Getting Started with Real Options Analysis Toolkit Software	p. 278
The Lattice Viewer	p. 284
The Help Environment	p. 288
Solving Customized Options	p. 288
Accessing the Functions, Running Simulations and Optimization	p. 292
Appendix Expensing of Employee Stock Options (FAS 123): The Death of Black-Scholes	p. 297
Part 8 More Industry Applications
Chapter 14 Extended Business Cases II: From Land to Money	p. 325
Case Study: Understanding Risk and Optimal Timing in a Real Estate Development Using Real Options Analysis	p. 325
Case Study: Using Stochastic Optimization and Valuation Models to Evaluate the Credit Risk of Corporate Restructuring	p. 341
Part 9 Risk Management
Chapter 15 The Warning Signs	p. 353
The Problem of Negligent Entrustment	p. 353
Management's Due Diligence	p. 354
Sins of an Analyst	p. 354
Questions	p. 375
Chapter 16 Changing a Corporate Culture	p. 377
How to Get Risk Analysis Accepted in an Organization	p. 377
Change-Management Issues and Paradigm Shifts	p. 377
Making Tomorrow's Forecast Today	p. 381
Five-Minute Industry Spotlight: Banker's Trust	p. 382
Five-Minute Industry Spotlight: Environment Canada	p. 384
Notes	p. 387
List of Models	p. 395
Tables You Really Need	p. 401
Standard Normal Distribution (partial area)	p. 402
Standard Normal Distribution (full area)	p. 403
Student's t-Distribution (one and two-tails)	p. 404
Durbin-Watson Critical Values	p. 405
Normal Random Numbers (standard normal distribution's random number generated - (N(0,1))	p. 406
Random Numbers (multiple digits)	p. 408
Uniform Random Numbers (uniform distribution's random number generated between 0.0000 and 1.0000)	p. 410
Chi-Square Critical Values	p. 412
F-Distribution Critical Statistics (alpha-one tail 0.10)	p. 414
F-Distribution Critical Statistics (alpha-one tail 0.05)	p. 416
F-Distribution Critical Statistics (alpha-one tail 0.25)	p. 418
F-Distribution Critical Statistics (alpha-one tail 0.01)	p. 420
Real Options Analysis Value (1-year maturity at 5% risk-free rate)	p. 422
Real Options Analysis Value (3-year maturity at 5% risk-free rate)	p. 424
Real Options Analysis Value (5-year maturity at 5% risk-free rate)	p. 426
Real Options Analysis Value (7-year maturity at 5% risk-free rate)	p. 428
Real Options Analysis Value (10-year maturity at 5% risk-free rate)	p. 430
Real Options Analysis Value (15-year maturity at 5% risk-free rate)	p. 432
Real Options Analysis Value (30-year maturity at 5% risk-free rate)	p. 434
Answers to End of Chapter Questions and Exercises	p. 437
About the CD-ROM	p. 447
Index	p. 449

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Author Notes

Table of Contents