On the reliability of investment risk assessments

Abstract

The paper examines the reliability of investment risk estimates based on probabilistic realizations of purpose-designed scenarios. The calculations of the probabilities of scenario realization were based on logical and probabilistic methods. The reliability of risk assessment is understood as the probability of successful completion of a project, fulfillment of all contractual obligations: construction in compliance with the architectural and engineering design and quality requirements, within the contractual period and approved budget. Investment risks were estimated based on eight primary scenarios. The realization of the risks of the main group depended on the realization of the various numbers of risk scenarios of each subgroups in the main group. For instance, the first scenario of the main group consisted in the risk of faulty project ROI analysis and the risk of underestimated construction budget. The second one consisted in the risk of underestimated construction budget and risk associated with the selection of the basic flowsheet and primary process parameters, etc. The risks of each subgroup could be obtained by means of expert estimations or, in case of sufficient statistical data, based on the actual distributions. A mathematical model was developed for the purpose of a computerized solution. The mathematical model also allowed identifying such dependability factors as “weight”, “significance” and “contribution” of each risk in the success of an investment project (reliability structure of investment risk estimation). The analysis of calculation data enabled the identification of the probability of successful project completion (reliability), the risks that are the most important, significant and having the largest contribution to the successful implementation of investment projects. Also, the risks were identified that have the least pronounced effect on the successful implementation of an investment project.