EvA - Risk Analysis. A set of utilities for Microsoft Excel: Sensitivity analysis, Scenario approach, Monte Carlo analysis, Distribution adjustment.
Algorithm for Scenario approach

Scenario approach estimates possible outcomes on the basis of expert assessments. In comparison to sensitivity analysis, several risk factors are considered at a time (multiattribute stress tests). Choice of the changing factors may be performed on the basis of historical data as well as hypothetical scenarios. The advantage of this type of a stress test is a more flexible formulation of possible events.

Algorithm for Scenario approach:

  • Set the number of considered scenarios and probability for each of them
  • Choose the set of variables (risk factors)
  • On the basis of expert assessment define values of chosen factors for each scenario

Form of paramaters settings

On the bases of the calculated values for each scenario we can draw a distribution function for the analyzed resulting value (assuming a normal distribution law). Now some qualitative risk assessment is possible as well. For example, one can calculate Value-at-Risk (VaR) – a measure of maximum exposure to losses with a set probability.

Calculation results in the Excel sheet

Despite the simplicity and attractiveness of such an approach, it does not consider correlation between risk factors, resulting in incorrect outcomes.
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