69
Portfolio Risk Management
Study Hints
Similar to risk management at the project or program levels, it is even more
important at the portfolio level. Many of the same tools and techniques can be
used, but at a higher level, and others are more sophisticated since the portfo-
lio risks are numerous and are from many different sources. The Portfolio Risk
Management questions on the PfMP
®
certication exam constitute 15% of the
exam or 25 questions.
These questions are part of the Portfolio Risk Management Knowledge area
as well as in the Dening and Aligning Process Groups in The Standard for
Portfolio Management—Third Edition (2013). There are two processes in Portfolio
Risk Management:
1. Develop Portfolio Risk Management Plan
2. Manage Portfolio Risks
The rst process is from the Dening Process Group, and Manage Portfolio Risks
is in the Aligning Process Group.
It should be noted that the denition of portfolio risk in The Standard on
page 119 is slightly incorrect, and instead the denition in the Glossary section
should be followed. The purpose of portfolio risk is to assess and manage any
risks to the portfolio and strive to focus on exploiting opportunities and mini-
mize threats that may affect the portfolio. It also emphasizes interdependencies
between risks between components, especially between the high- priority ones.
Through risk management, new components may be identied to consider to be
added to the portfolio.
At the portfolio level, risk management focuses on short-, medium- and long-
term risks. It differs from that at the program or project level with the long- term
view as the organization may decide to embrace a risk as it may view it as one
with a high reward. Such an approach is especially noted in organizations work-
ing on complex new products in which the desired technology may not be
available as expected. Therefore, at the portfolio level the focus is to increase the
70 ◾ PfMP® Exam Practice Tests and Study Guide
possibility of positive events while decreasing any that may adversely affect the
portfolio considering value, the strategic t, and portfolio balance.
This approach means active consideration of the organization environment
to evaluate its management practices and approaches, the number of concurrent
components, and the dependency on stakeholders external to the organization
for component and overall portfolio success. It then is critical in portfolio risk
management to determine the root cause of any negative risks and correct it as
well as to capitalize on potential positive opportunities.
Reserves are needed at the portfolio level because of possible threats, and
their management is a responsibility of the portfolio manager. The portfolio man-
ager also can in some cases aggregate risk responses through common character-
istics and often relies on equity protection. The emphasis is on risk planning, risk
assessment, and response.
As well, external, structural, and execution risks may arise and require consid-
eration. Anyone can identify risks, and the culture should be one in which open
communication about risks is encouraged. But, people at different levels also
will have different perspectives regarding risk and different concerns to address.
Issues of transparency, organizational integrity, and corruption are other con-
siderations especially since risks at the portfolio level are greater than the sum
of those at the program or project levels. Risk thresholds and overall organiza-
tional attitudes toward risk require identication to see if the organization is risk
adverse, tolerant or risk taking. Since internal portfolio risks are greater if they
occur, resource commitments then may be required for positive or negative risks.
The portfolio risk management plan describes the approach that will be
followed with references to any applicable organizational policies and is used
to assess new risks in proposed components as well as overall portfolio risk.
The plan also shows how the portfolio oversight group will balance investments
against expected return for known risks to support risk- based decisions.
In developing the plan, it is useful to review the portfolio management plan,
portfolio and organizational process assets, and enterprise environmental factors.
Useful tools and techniques include weighted ranking and scoring techniques.
These are helpful especially in organizations with multiple portfolios and can be
applied to technical and management risks. High- level risk plans can be dened
by these techniques along with cost elements and schedule activities and needed
risk contingency reserves. Graphical analytical techniques also are useful such as
a probability/ impact matrix as shown in Figure8-5 in The Standard. Other con-
siderations include importance, timing, interdependencies, condence limits, and
prioritized risk lists. A number of different quantitative and qualitative techniques
can be used such as status and trend analysis, rebalancing methods, different
investment approaches, and risk exposure charts. These charts, for example,
can provide useful information such as the outcome probability analysis of the
portfolio and the probability of achieving the portfolio’s objectives, as shown in
Figure8-6.
Portfolio Risk Management ◾ 71
The risk management plan then describes the methodology that will be fol-
lowed, specic roles and responsibilities, risk measures, how often the risk man-
agement process will be performed, and categories, with examples as shown in
Figure8-7.
As the plan is completed, the Manage Portfolio Risks process is under way
continuously. It consists of risk identication, analysis, responses, and overall
monitoring and control. This process involves review of the overall portfolio and
development of a portfolio risk register, similar to that at the program or project
level as well as an issue register. It also involves reviewing the portfolio manage-
ment plan, reports, portfolio and organizational process assets, and enterprise
environmental factors.
As in the planning process, weighted ranking and scoring techniques may
be useful to evaluate any existing risks and identify any new ones. Quantitative
and qualitative analyses also are helpful. One approach is to prepare a Tornado
Diagram, see an example in Figure8-10, to show each identied risk’s contribu-
tion or impact to strategic objectives. Other approaches are net present value,
sensitivity analysis Monte Carlo simulations, investment choice analysis, and vari-
ance analyses.
This process often leads to a need to repeat the entire risk management pro-
cesses and modify existing plans. Portfolio reports in addition to the risk register
are helpful, such as the example shown in Figure8-11.
Following is a list of the major topics in the Portfolio Risk Management domain.
Use this list to focus your study efforts on the areas that are most likely to appear
on the exam.
72 ◾ PfMP® Exam Practice Tests and Study Guide
Major Topics
Portfolio risk management purpose
◾ Assess and analyze portfolio risks
◾ Capitalize on opportunities
◾ Minimize threats
◾ Assess interdependencies
◾ Determine risk versus reward
◾ Provide overall risk reserves
◾ Consider
− External risks
− Internal risks
− Structural risks
− Execution risks
◾ Identify risks by people throughout the organization
◾ Determine the organization’s risk threshold
◾ Assess resource needs
Dening Process Group
Aligning Process Group
Develop Portfolio Risk Management Plan process
◾ Purpose
◾ Inputs
◾ Portfolio management plan updates
− Governance model
− Performance management
− Communication
− Stakeholder engagement
◾ Portfolio process assets
− Components
− Selection criteria
− Prioritization algorithms
− Risk register
− Issue register
− Performance matrices
− Resources
− Budget
◾ Organizational process assets
− Vision and mission
− Strategy and objectives
− Risk tolerance
− Lessons learned
Portfolio Risk Management ◾ 73
◾ Enterprise environmental factors
− Organization culture and structure
− Organizational project management
− Legal and regulatory
− Industry requirements
− Market conditions
− Published information
◾ Tools and techniques
− Weighted ranking and scoring
• Important portfolio risks, owners, tolerance, process
− Graphical analytical methods
• Probability and impact matrix
• Importance, timing, interdependencies, condence limits, prioritized lists
− Quantitative and qualitative analysis
• Status and trend analysis
• Rebalancing methods
• Investment choice tools
• Risk exposure charts
◾ Outputs
− Portfolio management plan updates
− Portfolio risk management plan
• Methodology
• Roles and responsibilities
• Measures
• Frequency
• Categories
− Portfolio and organizational process asset updates
Manage Portfolio Risks
◾ Purpose
− Identify risks
− Analyze risks
− Develop risk responses
− Monitor and control risks
◾ Inputs
− Portfolio
• Risk register
• Issue register
− Portfolio management plan
• Roadmap, funding, technical knowledge, guidelines, budget
− Portfolio reports
• Performance
• Governance decisions
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