Uncertainty of the external environment, risk factors and choice of investment decision analysis method
Uncertainty - the situation of incompleteness and inaccuracy of information both about past situations of implementation of such investment decisions, and about the development of events in the future. Alternative situation - Determinism when there is complete and consistent information.
The peculiarity of calculating the fair value of a company, a project, an investment asset in a situation of uncertainty is the set of possible estimates of input parameters, variability (volatility) of the result of calculations, depending on the variants of development of events put into analysis.
Risk is the probability of obtaining a result that is different from what is expected. Risk is a probabilistic category that reflects the possibility of rejecting the result of an estimate (forecast) from some most anticipated option. Distinguish net risk as the probability of negative deviations (undesirable) and speculative risk as the probability of any deviations.
The general recommendation for making decisions in a situation of uncertainty is to introduce probabilistic estimates of the results, i.e. go to the decision of the decision in a risk situation (to estimate the ranges of the parameters and the probability of implementing certain events) and either to take decisions through a multicriteria task (for example, three-dimensional: the probability of success, the correspondence of strategy and commercial efficiency) or to integrate the risk assessment into the integral value NPV for the project (investment program).
The traditional way of assessing in a risk situation is as a cash flow, fixing the expected values, estimated taking into account various options for future development, and as a discount rate - a risk-free rate adjusted for risk. For a number of risk factors, this method is acceptable. This approach was implemented when considering risk premiums within a portfolio and cumulative construction (see Chapters 19 and 20). Some investment decisions require a different approach, which will be discussed below.
Highlight environmental risk factors (the so-called objective risks) and internal risk factors. The environmental risk factors are:
1) macroeconomic risks, including fluctuations in market conditions, prices, exchange rates, interest rates, changes in government regulation of the economy and certain industries (for example, regulations), features of law enforcement, tax changes, developments in the external economic situation (restrictions on trade, closing borders);
2) political risks (change of ruling elites and changes in investment climate);
3) environmental risks (floods, earthquakes, climatic disasters);
4) social risks (criminalization, terrorism, sabotage, strikes).
The factors of internal risk of an investment decision include:
1) progress in the timing of the implementation of individual phases of the project;
2) failure to perform contracts;
3) misinterpretation of the interests of project participants (conflicts of participants);
4) digging managers, i. realization of their own interests (conflict between ownership and management).
An effective tool for identifying and ranking risks is the construction of risk charts, which are a diagram where the amount of possible damage (the significance of the risk) is fixed on the horizontal axis, and the probability on the vertical axis (Figure 30.1). Such risk cards are built on the basis of both quantitative and qualitative indicators.
Fig. 30.1. Risk Card
In the example of the risk card, Arabic numerals indicate a limited set of identified risks, each of which is mapped, depending on the likelihood of its occurrence and the impact on the results. This is a preliminary risk assessment, on the basis of which it is possible to make decisions about risk management methods. Fatty broken line is the critical limit of risk acceptability: risks above this line should be minimized (insured, hedged, diversified), risks below the line can be assumed or considered manageable in working order.
All types of risk can be divided into three classes: discrete, which are associated with progress in the external environment and with strategic decisions of the company (for example, entering the market of competitors, joining the WTO), sequential (which are associated with a phased introduction to the market) and market (continuous), which are characterized by constant fluctuations of market and industry factors (prices for products and raw materials, interest rates, exchange rates, etc.). Consecutive risks can be considered as a variant of discrete.
The choice of a method for analyzing an investment decision under risk conditions and constructing an economic efficiency estimate can be linked to the prevalence of a particular risk class (for example, discrete or continuous). Figure 30.2 demonstrates the expediency of choosing a method for analyzing the effectiveness of risky investment decisions depending on the risk class.
In Fig. 30.2 the methods allowing to receive an integrated estimation of the investment decision taking into account risk factors are resulted. This is the first and most popular method in the academic literature. Recall that this is not the only option for the analysis of investment assets. An alternative is multi-criteria analysis, where the risk (probability of implementation) is viewed as an independent projection (Figure 30.3). Economic efficiency and financial feasibility are calculated under conditions of certainty or conditional low risk (for example, within the framework of the DCF design). The risk projection is often fixed according to the degree of sustainability of the economic efficiency projection to some market progress. The more stable the low-risk performance score, the higher the score on the "Success Score" scale. As a third projection, the degree of compliance with the company's strategic goals is often considered (for example, development of staff competencies, social significance, development potential, etc.).
Fig. 30.2. The choice of acceptable methods for justifying the effectiveness of risk-based investment
Fig. 30.3. Multi-criteria approach to the selection of investment projects
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