Portfolio risk management

Portfolio risk management is a process of identifying, assessing and controlling risks across multiple project portfolios. It involves analyzing the interdependencies between projects, the potential impact of risks on the overall portfolio, and creating strategies to minimize the impact of risks on the portfolio and its objectives. It is a proactive approach to ensure the successful completion of the portfolio, and involves the identification and assessment of risks, the development of risk management strategies, and the implementation of those strategies.

Example of portfolio risk management

• Portfolio risk management is the process of identifying, assessing and controlling risks across multiple project portfolios. It involves analyzing the interdependencies between projects, the potential impact of risks on the overall portfolio, and creating strategies to minimize the impact of risks on the portfolio and its objectives. For example, a portfolio manager may conduct a risk analysis to identify potential risks and develop strategies to ensure the successful completion of the portfolio. This could include monitoring project progress, developing contingency plans, and allocating resources to mitigate risks.
• Another example of portfolio risk management is diversification. By diversifying the portfolio, the manager is spreading out the risk of one project or area of investment impacting the entire portfolio. Diversification can involve allocating capital to different types of investments or investing in different industries. This strategy can help reduce the impact of unexpected market or project changes on the overall portfolio.
• A third example of portfolio risk management is hedging. A hedging strategy seeks to reduce the risk of an investment by taking positions in other assets that are negatively correlated with the portfolio. For example, a portfolio manager may purchase a put option on a stock to protect against a decline in the stock price. This strategy can help reduce the portfolio's exposure to losses should the stock price decline.

Best practices of portfolio risk management

1. Establish a Risk Management Process: Develop a risk management process to guide the organization in the identification, assessment, and management of risks. This process should be tailored to the organization's specific needs and objectives.
2. Identify and Analyze Risks: Identify and analyze the risks associated with each project, taking into account the interdependencies between projects.
3. Develop Risk Management Strategies: Develop strategies to mitigate the risks and to ensure that the portfolios objectives are met.
4. Monitor and Reassess Risks: Monitor the risks associated with the portfolio and reassess them on a regular basis to ensure that the strategies are still effective.
5. Communicate and Report: Communicate the risks and strategies to all stakeholders, and provide regular reporting on the progress of the risk management process.
6. Review and Update Processes: Review and update the risk management process, including the risk identification and assessment processes, on a regular basis to ensure that it is effective and up to date.

When to use portfolio risk management

Portfolio risk management is a process of identifying, assessing, and controlling risks across multiple project portfolios. It is typically used when:

• Organizations are undertaking multiple projects and need to manage risk across the portfolio as a whole;
• There are multiple interdependencies between projects, and risks need to be managed on a portfolio level;
• The goal is to minimize the impact of risks on the overall portfolio objectives;
• Organizations need to develop strategies to mitigate the risk of project failure;
• Organizations need to identify and address potential areas of risk;
• Organizations need to develop contingency plans in case of unexpected events;
• Organizations need to review and update their risk management strategies on an ongoing basis.

Types of portfolio risk management

Portfolio risk management is a process of identifying, assessing and controlling risks across multiple project portfolios. It involves analyzing the interdependencies between projects, the potential impact of risks on the overall portfolio, and creating strategies to minimize the impact of risks on the portfolio and its objectives. There are several types of portfolio risk management, including strategic risk management, operational risk management, financial risk management, and market risk management.

• Strategic Risk Management - this type of risk management involves assessing the potential risks to an organization’s long-term strategy, such as changes in market conditions, competitive pressures, and technological advances. It also involves creating strategies to minimize the impact of these risks on the organization’s strategic objectives.
• Operational Risk Management - this type of risk management involves assessing the potential risks to the day-to-day operations of an organization, such as changes in customer demand, employee turnover, and supply chain disruptions. It also involves creating strategies to minimize the impact of these risks on the organization’s operational objectives.
• Financial Risk Management - this type of risk management involves assessing the potential risks to an organization’s financial health, such as changes in interest rates, currency exchange rates, and credit ratings. It also involves creating strategies to minimize the impact of these risks on the organization’s financial objectives.
• Market Risk Management - this type of risk management involves assessing the potential risks to an organization’s market position, such as changes in customer preferences, regulatory requirements, and economic conditions. It also involves creating strategies to minimize the impact of these risks on the organization’s market objectives.

Advantages of portfolio risk management

Portfolio risk management is a proactive approach to ensure the successful completion of the portfolio and its objectives. It involves the identification and assessment of risks, the development of risk management strategies, and the implementation of those strategies. The advantages of portfolio risk management include:

• Improved risk visibility across multiple projects, allowing for better decision-making and risk mitigation strategies;
• Reduced risk of project delays due to better risk management, allowing for better project execution and completion;
• Improved cost control, as risks can be managed more effectively;
• Increased efficiency in resource allocation and utilization, as risks can be managed more effectively;
• Improved communication between stakeholders, as risks can be discussed and managed more openly;
• Increased profitability, as risks can be identified and managed early on in the project.

Limitations of portfolio risk management

Portfolio risk management is a process of identifying, assessing and controlling risks across multiple project portfolios, however, there are several limitations to this process, including:

• Difficulty in assessing the degree of risk associated with each project due to the complexity of the interdependencies and the number of projects involved.
• It can be difficult to accurately measure the impact of a risk on the entire portfolio, as the consequences of a risk can be felt across multiple projects.
• Risk management strategies may not be effective if the portfolio is not adequately monitored and reviewed regularly.
• The process can be costly and time consuming, as it requires significant resources to analyze the portfolio and develop appropriate strategies.
• It can be difficult to ensure that all stakeholders are adequately informed and engaged in the risk management process.
• The accuracy of the risk management process is dependent on the quality of the data it relies on, which can be difficult to obtain.

Portfolio risk management — recommended articles

Risk management methodology — Risk management techniques — Risk assessment framework — Level of risk — Risk response strategies — Identification of risks — Strategic risk management — Sources of risk — Risk treatment plan

References

• Micán, C., Fernandes, G., & Araújo, M. (2020). Project portfolio risk management: a structured literature review with future directions for research. International Journal of information systems and project management, 8(3), 67-84.