Noetzold & Noetzold

Integrating the Risk Dimension into Existing Decision Making Processes

The objective of corporate risk management in general is the future-oriented and optimal corporate management and steering under risk-return aspects. To achieve this goal, Noetzold & Noetzold developed the Opture® risk management system as a quantitative tool supporting future-oriented decisions. Most management decisions concerning strategy, investments, and projects refer to the future and thus contain uncertainties about the outcome. In the financial or corporate environment these uncertainties have a price (e.g. risk premia, option prices) that should be considered when making decisions. Considering uncertainties cannot only optimize decisions (e.g. risk-return) but can also lead to new more profitable alternatives. The Opture® system helps to identify, quantify, evaluate, price, and optimize decisions under uncertainty.

Within operational and strategic decision making processes it is necessary to know how risky or volatile planned returns (e.g. planned net income or investments) will be. Innovative board members and corporate managers do not consider only return figures (e.g. earnings, costs, EBIT, cash flow, ROI, EVA) as their key performance indicators (KPI) but also include the risk dimension into the planning processes (risk figures, key risk indicators (KRI)) to optimize the risk-return position of their company or of its business units. This yields additional returns from diversifications (in the same way as portfolios of stocks usually have higher returns at lower risks, following modern portfolio theory as introduced by Markowitz), uncovers hidden risk premia that were otherwise accepted without quantification and without approval, and altogether it delivers more precise predictions of future net (risk-adjusted) returns (or actual net present values (NPV)).

Risk Controlling and Risk Management are the pillars of a professional enterprise-wide risk management. The Risk Controlling integrates the risk dimension into the planning and monitoring processes for generating the risk-adjusted Profit and Loss statement, risk figures and optimized risk mitigation measures. Based on the risk-adjusted figures the Risk Management optimizes the risk-return position (e.g. efficient frontier, portfolio optimization) and decisions under uncertainty (e.g. risk-adequate strategy, investment, resource allocation).

The calculation of risk average values is not the primary objective of risk management because the risk averages only adjust planned figures (e.g. revenues, earnings) by expected or average values. Actual risk management figures like VaR, CFaR, Expected Loss, quantiles, etc. detail the form of probability distributions (PD) and therefore characterize the full spectrum of all possible (not generally expected, not averaged) outcomes. Risk aggregation considers the full spectrum of all possible outcomes of all individual risks and delivers a consolidated probability distribution with risk figures for the associated level of consolidation, e.g. the corporate or its business units.