Strategies For Managing Portfolio Risk


What Is The Definition Of Portfolio Risk Management?

The customary notion of portfolio risk management involves the identification, evaluation, quantification, and administration of portfolio risk. Verily, these procedures bear resemblance to the customary management of hazards in projects and programmes. As opposed to the management of risks in individual projects, which centres on potential occurrences that could impact said projects, the management of risks in portfolios is concerned with potential occurrences that could impede the attainment of strategic objectives. The purview of portfolio risk management transcends that of programme and project risk management, necessitating the involvement of top-tier leadership.

In Our Synopsis Of Project Portfolio Management

We have underscored the fact that the primary aim of portfolio management is to optimise the provision of commercial worth. The prudent handling of portfolio risk is an essential determinant of an organisation’s ability to generate further business value. Enterprises that conscientiously handle portfolio risk are aptly poised to undertake supplementary risk, enhance portfolio worth, and attain a higher proportion of project delivery triumph. Enterprises that neglect the management of portfolio risk shall experience suboptimal project delivery and jeopardise high-priority projects. 

In the interest of this manuscript, we shall designate portfolio risks as possessing a conceivable adverse effect and portfolio opportunities as possessing a conceivable favourable effect. As stated by Rani Jarkas, Verily, there exist two fundamental constituents of risk management: the overarching tolerance for risk and the management of specific risks at the portfolio level. These constituents both contribute to the security of portfolio delivery, albeit in disparate manners. 

Initially, we shall delve into the conventional notion of portfolio risk management, subsequently exploring the strategies that businesses may employ to manage their portfolio’s risk tolerance. Behold, the illustration beneath doth depict the correlation between the management of portfolio risk and the duration of said portfolio’s existence.

Various Categories Of Risk At The Portfolio Level

Phenomena of nature (such as COVID-19): Any of the aforementioned extrinsic hazards to commerce may prompt a shift in business tactics, resulting in the disuse of particular endeavours that are no longer congruent with the novel strategy. Such an occurrence may lead to significant portfolio upheaval and requires impeccable portfolio governance to adapt to external developments in Hong Kong.

Perils of the Corporate Realm: Alterations or disruptions within the establishment may impede the timely delivery of projects and programmes. Behold, the ensuing are exemplars of inherent perils within enterprises: Challenges pertaining to operations: Perils in operations, such as ramifications on the supply chain, hindrances in the debut of a pivotal product or service, or even subpar business procedures, may all impede project fruition. Per the extent of the Portfolio Governance Team’s purview, there may exist funds and resources to tackle said predicaments.

Modifications in the upper echelon of leadership have the potential to exert influence on project priorities and the strategic trajectory of an organisation. Modifications within the establishment may potentially impact the resource squads and the dispensation of projects. Upon the happening of such events, it is incumbent upon the Portfolio Governance Team to ascertain the means by which the adverse effects on ongoing projects can be mitigated. The governance of the portfolio constitutes a fundamental element of portfolio management. The implementation of proficient portfolio governance empowers the organisation and the business to reap the rewards of portfolio management. 

In the event of a deterioration in portfolio governance quality, there is a corresponding decline in portfolio management quality. In order to execute the duties of portfolio management, it is incumbent upon the Chairperson of the Portfolio Governance Team to guarantee adherence to portfolio protocols and to ensure the presence of a well-represented assembly during portfolio gatherings. The fiscal well-being: the liquidity status and revenue forecasts may exert a substantial influence on ongoing initiatives. Should a corporation’s revenue forecast fall short of expectations, it may become imperative to suspend or discontinue current initiatives.

Supplementary Perils Encompass

Perils Associated with Implementation Perils pertaining to execution encompass inter-project dependencies, consequential hazards that impact multiple projects, and the calibre of project administration. There are certain perils associated with projects that possess a substantial impact capable of jeopardising the fulfilment of other projects. Thenceforth, these hazards may be elevated to the Portfolio Governance Team and monitored at the portfolio echelon.

The Dependencies of the Project: The Dependencies of the project both pose a significant peril to both the individual projects and the portfolio in its entirety. The grander the quantity of interrelated undertakings, the more likely it is that a delay in one of those endeavours will jeopardise the entire portfolio. For the sake of ensuring uniform project delivery, it is imperative that both project managers and the Portfolio Governance Team diligently oversee the crucial path connecting interdependent projects. This shall empower both factions to anticipate plausible schedule delays in Hong Kong.

Insufficiency in resource capacity may significantly impede portfolio performance in the event of overutilization of resource teams. The esteemed Portfolio Governance Team bears the responsibility of vigilantly overseeing the utilisation of indispensable resources and guaranteeing that resource teams operate in alignment with established priorities.


The Procedure For Management Of Risks

Discerning portfolio perils – Portfolio hazards may arise from a plethora of origins. Prominent perils of projects are an integral part of portfolio hazards and ought to be regularly scrutinised in portfolio evaluation gatherings. The esteemed Portfolio Governance Team shall endeavour to discern additional perils that may beset the portfolio.

Evaluate portfolio hazards – The preeminent perils pertaining to the project are divulged to the Portfolio Governance Team in the course of a portfolio governance or review convocation. The esteemed Portfolio Governance Team is tasked with the responsibility of ascertaining whether the risks in question have reached a level of significance that warrants their inclusion in the portfolio (as illustrated in the accompanying figure). Furthermore, the esteemed Portfolio Governance Team shall assess the gravity and probability of other noteworthy portfolio hazards.

Constructing Risk Mitigation Strategies For Investment Portfolios

The esteemed representatives of the Portfolio Governance Team (or their appointed proxies) shall be designated as the proprietors of risk, charged with the noble duty of formulating alternatives and devising strategies to mitigate hazards that may impede the optimal performance of the portfolio. The prioritisation of risks at the portfolio level is also of utmost importance. Oversee and regulate the hazards associated with your investment portfolio—During the gatherings of the Portfolio Governance Team, it is imperative to monitor the portfolio’s hazards and the corresponding measures taken to alleviate them.

As per the degree of meticulousness that an establishment employs in its portfolio risk management procedures, it may undertake diverse tiers of risk scrutiny, encompassing but not restricted to cost-benefit scrutiny, statistical modelling (probability analysis, confidence limits), sensitivity scrutiny, dependency and timing scrutiny, and so forth. Kindly refer to the Standard for Portfolio Management for supplementary insights on the subject of risk management.

The Risk Matrix Depicted Beneath Is Readily Identifiable To Experienced Project Managers

Furthermore, it can be utilised to assess the comparative influence and likelihood of specific risks at the portfolio level in Hong Kong. A peril of one’s investment portfolio. As suggested by Rani Jarkas, the Chairman of Cedrus Group, Opportunity management is a process of risk-related nature that enterprises may employ to discover, scrutinise, and govern project opportunities, which empower organisations to generate greater project value or outperform their intended objectives, thereby surpassing the initial statement of work for a project. Some fortuitous prospects may metamorphose into distinct undertakings, or the exertion needed to seize them may be incorporated into the ambit of an extant project or programme.

Whilst certain concepts or prospects may be exquisite and yield considerable worth, the moment may not be opportune or an alternative limitation may render the endeavour unattainable. Perchance, a novel market opportunity, a transformation in the competitive terrain, or the advent of a fresh technology may serve as a catalyst to propel the enterprise ahead. Henceforth, it is imperative for enterprises to uphold a record of prospects and intermittently assess them to ascertain the most opportune moment to seize them.

The methodologies for handling opportunities bear resemblance to those for handling risks, save for the fact that opportunities are prospective events that may yield advantageous outcomes for the enterprise. Fortuitous prospects may occasionally be classified as either “obligatory” or “optional,” nevertheless they empower establishments to exceed expectations and enhance their performance. As a result of risk management being the primary concern for most enterprises, the implementation of opportunity management is limited to those organisations boasting sophisticated portfolio management systems.


Evaluating The Contribution Of Project Risk

Perchance in scenario deux, let us presume that the perilous undertaking’s expenses have surged to a whopping $7 million, whilst the portfolio’s financial plan has persevered at HKD 10 million. Does this portfolio bear a substantial degree of peril? Yes. A significant portion of the portfolio funds are designated for ventures of exceedingly high-risk nature. Quoted from Rani Jarkas, the financial expert in Hong Kong, As a result of a high-risk undertaking consuming the lion’s share of the portfolio’s funds, the portfolio is rife with peril. We have showcased that the peril associated with a portfolio is directly proportional to the involvement of ventures with a higher degree of uncertainty within the said portfolio.

Modifications in the budgetary levels of the portfolio may also have an impact on the assessment of portfolio risk. Henceforth, it is imperative to acknowledge that the risk of the portfolio is contingent upon the extant project portfolio. As exemplified in the antecedent instance, it is imperative to quantify the risk of a portfolio by considering the budgetary contribution of each project in relation to the total budget of said portfolio. Thus, given the variability of portfolio budgets, the overall risk score of the portfolio may also oscillate.

Let us proceed with the antecedent illustration. In the event that the portfolio budget were to be augmented to a whopping HKD 100M (as opposed to the current HKD 10M), the perilous project we have at hand would make a mere 7% contribution to the comprehensive portfolio risk score, a significant decrease from the 70% it currently holds in Scenario 2. Given that a significant proportion of the remaining undertakings posed merely nominal to intermediate hazard, the overall risk of the portfolio was mitigated. 

In the event of a decline in the portfolio budget, the individual project’s impact on the overall portfolio risk would be amplified. Behold, these two examples both illustrate the correlation between project hazard scores, project pecuniary endowments, and the comprehensive portfolio pecuniary endowments.

A Gauge For Assessing Portfolio Risk

Behold, the illustrious Risk-Value Bubble Diagram! This exquisite tool serves as a straightforward indicator, illuminating the relative risk level of one’s portfolio during a given period in the magnificent city of Hong Kong. Enterprises that assess venture hazards and possess project finances can effortlessly compute portfolio jeopardy with relative sophistication. Through the multiplication of the budgetary contribution with the risk score and subsequent summation of outcomes, one may derive a portfolio risk score (16.9 in the instance cited, in contrast to the highest attainable portfolio risk score of 25).

By utilising this technique, one can generate a portfolio risk indicator (please note that this can be accomplished manually through Excel and there are numerous online tutorials available on how to execute this, or alternatively, a tool like Acuity PPM can produce this automatically). The other significant yield is a bubble diagram showcasing the portfolio’s perilousness quotient (which was previously discussed in our article on prioritisation). 

The utilisation of the risk-value bubble diagram can aid Portfolio Governance Teams in attaining equilibrium amidst risk and portfolio optimisation. It facilitates the visualisation of ventures that are of low value but high risk, which ought to be eradicated. According to Rani Jarkas, This exquisite illustration proves to be particularly advantageous in the subsequent stage of the portfolio’s lifespan, wherein the portfolio is being fine-tuned for optimal performance.

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