Effective Use of @Risk for Building

and Constructing Risk Models

JIFSAN, University of Maryland
Univ. Of Maryland & US FDA

Joint Institute for Food 1

safety and
Applied Nutrition

Learning Objectives
At the end of this session you will:
learn how to build and construct models using @Risk
use software features and avoid pitfalls
learn how to analyze models and present results
learn how to make user friendly models
do some exercises

Running a Simple Risk Analysis

Topics to discuss:
@Risk functions
Defining the outputs
Listing the inputs and the outputs

@Risk
Is an add-in for Microsoft Excel that performs risk
analysis on any spreadsheet model by using
Monte Carlo simulation
When you launch @Risk, Microsoft Excel is opened
automatically
@Risk makes a new toolbar in Excel
The toolbar lets you run many commands that you
will need to run a risk analysis

@Risk Menu
Have access to @Risk functions and results
windows through @Risk menu
Click on @Risk Menu

Newer versions of Excel may appear different

and may have additional options.

Lets Look at an Available

Example
Open the example file finance.xls (you can find it
on the same webpage with the link to this
presentation
This model calculates net cash flow and net
present value for a new product
Although this example has financial nature, @Risk
can be used with any spreadsheet model you
create
We will build a few microbial risk assessment
models later

Finance.xls Model

Finance.xls Model(continued)
For each year, net income is affected by number of factors
including:
Number of competitors (C25:L25)
Sales price (C31:L31)
Sales volume (C32:L32)
Capital Expenses (C36:L36)
Product development (C35:L35)
Overhead (C37:L37)
Net income is calculated for each year (C22:L22)
Net present value is calculated at 10% discount rate for the 10 year
period (C10)

Lets Take a Deeper Look at the

Model
Lets take a look at the content of Cell E32
[E32]=RiskNormal(3000,1000)/(E25+1)

RiskNormal is an @Risk probability distribution function for a normal

distribution
@Risk has more than 3 dozen probability distribution functions
If a cell has an @Risk function, we refer to it as an input variable. Thus,
E32 is an input variable!
Each probability function represents a range of values along with their
corresponding probabilities that can occur

Lets Take a Deeper Look at the

Model(continued)
@Risk probability functions can be either directly
written into a cell or we can use the Define
Distribution button on the @Risk toolbar

Click the Define

Distribution button
when you selected
Cell E32.
What do you see?

Define Distribution Button

@Risk function for
the distribution

Distribution type, e.g.,

Normal
Mean value, e.g., 3000
Standard deviation, e.g.,
1000

You can shift the mean

value or trim the left
and/or right tails of the
distribution

Selected statistics of the distribution,

e.g., mean, median, mode, etc.

Define Distribution Button

(continued)

During the simulation, @Risk randomly samples

values for Cell E32 across the full range of the
normal curve
For each iteration, a new randomly generated
value will be placed in Cell E32
Why the current value of Cell E32 is 3000?
When the simulation is not running, @Risk returns
the mean of the distribution

Other Types of
Distributions
Lets look at Cell F25. What is the distribution
function?
[F25]=RiskDiscrete({0,1,2},{1,1,1})

This distribution is discrete, as opposed to being

continuous (previous example)
The distribution holds only three values (i.e., 0,1,
and 2) with equal probabilities

Now Lets Define a Distribution

Ourselves
Select Cell E26 and click the button for defining a
distribution
There are two ways to select a distribution
Using the drop-down list
Using the distribution palette
Distribution palette

Drop-down list

Now Lets Define a Distribution Ourselves

(continued)

Lets select the triangular distribution

@Risk function for triangular
distribution:
RiskTriang(min, most likely, max)
Minimum value
Most likely value
Maximum value

Put 15 as the minimum value and truncate the function at 20

[E26]=RiskTriang(15,23.25,26,RiskTruncate(20,))

Now Lets Define a Distribution Ourselves

(continued)

Assign the distribution to the

selected variable by clicking on the
Apply or OK button

Now the Output

In @Risk, the output is the value that we are
interested in studying, i.e., a bottom line value
In this model, we are interested in net present
value which is calculated in Cell C10
To add Cell C10 as an output, first select Cell C10
and then click the Add Output
button on the @Risk
Add Output button
toolbar

Now the Output(continued)

You will be given a dialogue to select a name for
the output
@Risk selects a name for the cell based on the
neighboring cells (e.g., NPV(10%))

Now the Output(continued)

We are also interested in Net Income as an output
which is calculated in Cells C22 to L22
Highlight the whole row, then click on the Add
Output button
Select a name for the output (e.g., Net Income)
Now we have defined everything!
You can click on Show @Risk-Model Window or
Model Window button to check the list of inputs and
outputs you have entered into your model

Take Away Points

We learned about @Risk functions
We learned how to define the outputs
We learned how to list the inputs and the outputs

Running a Simple Risk Analysis

Topics to discuss:
Simulation Settings
Running a simulation
The @Risks results window
Sensitivity and scenario analysis in @Risk
Generating reports in Excel

Simulation Setting Dialogue

There are many aspects to a successful
simulation

Robust model
Robust distribution functions that
accurately define variability and
uncertainty in inputs
Mechanical aspects

How @Risk samples data from the

distributions
How long we should simulate
@Risk allows you to control the

Click on the Iterations Button

# Iterations: Number of iterations during a
simulation (more complex models may
require larger number of iterations)

There are options for

Updating the display

Pause on error in outputs
Using multiple CPUs
Minimizing @Risk and Excel when simulation starts

In newer versions the options are directly embedded in the toolbar

Settings in the Simulation toolbar box

Click on the Sampling Button

Sampling type
Latin Hypercube (for faster convergence)
Monte Carlo

Select the default value, i.e., Latin

Hypercube

WARNING
The following slides are for an older version of @RISK.
They have not been updated or adapted for the New
Release of both Excel and @RISK. If you have questions
or are confused because of the layout we highly
recommend you view the following links:
@RISK Quick Start http://www.palisade.com/QuickStart/EN/RISK/
@RISK Guided Tour http://www.palisade.com/GuidedTour/EN/RISK/
25

We are Now Ready to Start the

Simulation
Click the Start Simulation button to start the
analysis
During the simulation @Risk recalculates the
spreadsheet using random values sampled
from the input distribution functions and
record the output values
When the simulation is completed, the results
are shown in the @Risks results window
In the results window, we can interactively
analyze the statistics and graph the simulation

Simulation Results
@Risk provides a number of different methods for
analyzing and working with data
Summary statistics window
Detailed statistics window
Data window
Sensitivity window
Scenario window

Summary Statistics Window

Summary Statistics Window

(continued)

Summary statistics window displays a

summary of the simulation results
including minimum, mean, and maximum
values calculated for each output cell and
input distribution
For example in our simulation, NVP has a
minimum value of -66813.52, mean value
of 447635.7, and maximum value of
1257205 (note the difference in your
numbers! What is the reason?)
Is this a very risky venture due to wide
range of results?
What is the risk of loosing money? You can
answer this question by adding a target

Detailed Statistics Window

Detailed Statistics Window

(continued)

The detailed statistics toolbar provides statistics

for each of the output cells and input distribution
Additional statistics include variance, skewness,
and percentiles

Data Window
The data command displays all the data generated
and collected during each simulation

Sensitivity Command
Often you want to know
how the input variables affected the output values
Which inputs are the most critical ones

The sensitivity command provides answers to the

above questions
@Risk uses two techniques for sensitivity analysis
Multivariate Stepwise regression analysis
Spearman (rank) correlation analysis

Sensitivity Command

(continued)

Output of interest
Method of sensitivity analysis

Sensitivity Command

(continued)

Click on the sensitivity command button

You will see a list, ranking of inputs based on their
effect on the selected output
For example, for NVP as the output of interest the
number of competitors is by far the most
important input
For either of two sensitivity methods used by
@Risk, a value of zero indicates the changes in the
input variable have no effect on the output

Sensitivity Command

(continued)

The greater the magnitude of value, the bigger the

impact
A positive value indicates as the input increases so
does the output
A negative value indicates as the input increases
the output decreases and vice versa

Scenario Analysis

Scenario Analysis

(continued)

Scenario analysis allows you to determine

which input values contributes significantly
toward reaching a goal
For example, which variables contribute to
exceptionally high or low NVP values?

When NVP>90%, i.e., NVP is at or

above its 90th percentile value, sales
volume and number of competitors
are the most important variables
For exceptionally low NVPs, i.e.,
NVP<25%, the number of competitors
is the most important input

Reporting Results Directly to Microsoft

Excel
@Risk can also
generate results and
report directly to
Microsoft Excel
This gives you
access to all Excels
capabilities for
formatting graphs
and reports
For this purpose,
you should click on

Reporting Results Directly to Microsoft

Excel (continued)
Report Settings contains a list of all
the different types of Excel reports
@Risk can create
First, select Generate Excel Reports
Then, choose any or all the optional
reports
@Risk can also use pre-built Excel
template files that includes
costume formatting, titles, and
logos
Quick summaries and quick report

Take Away Points

We learned how to specify the simulation settings

We learned how to run a simulation
We looked into the @Risks results window
We practiced sensitivity and scenario analysis in
@Risk
We learned how to generate reports in Excel

Graphing the Results

Topics to discuss:
Histograms and cumulative graphs
Real time updating graphs
Summary graphs
Overlay graphs
Tornado graphs
Graphing in Excel

Graphs in @Risk
One of the strength of Monte Carlo
simulation is that you generate
enough data to present your
results using graphs
@Risk has a number of
presentation quality graphs
Graphs typically provide a very
good description of an output
Using graphs in @Risk is very easy:
select an input or an output of

Lets Create Graph for the NVP

Lets Create a Histogram for

NVP

Lets Create a Histogram for NVP

(continued)
Histogram shows the
distribution of possible
values for the selected
output
The height of each bar
represents the number
of samples fell in the
range defined by the
width of each bar
In short, the histogram
is the graphic
representation of the
uncertainty inherent in
the selected variable

Question: What is the probability of

having NVP between 1 million and
500,000$? Approx. 34%

Lets Create a Histogram for NVP

(continued)
You can format the graph by right clicking
on the graph to bring up the options menu
You can change
The type
The format
Scaling
Colors
Titles
etc

Real Time Results

@Risk can generate graphs during the simulation
Such graphs will be updated in a real time as the
simulation runs
This can be done using real time toolbar

Real time toolbar

Summary Graphs
What about the output range
we selected in our model,
i.e., net income?
One advantage of selecting
a range as the model output
is that we can study the
changes of the whole group
at once
Right click on net income
and select the Summary
Graph
The Summary Graph
summarizes the distributions
generated for the cells
selected in the output range

Summary Graphs

(continued)

Outer green band

extends from 5th to the
95th percentiles
Red band represents
one standard
deviation above and
below the mean
Distribution of mean
over 10 years

You can change these values by right clicking on the graph, selecting format,
and changing values in the Type dialogue

Summary Graphs

(continued)

The summary graphs are very useful to look at

how values are changed across an output range
In this example, the graph shows a negative
income for the first few years of the project with
and expected positive cash flow in the subsequent
years
The trend widened at year 6 indicating this year
has the largest risks

Overlay Graphs
There may be times when you want
compare two or more variables on one
graphs
@Risk allows you to create overlay graphs
easily
For this purpose:

First, you can make a graph of the

first variable you want to compare
Second, right click on the second
variable in the inputs/outputs explore
list and select Overlay an Active
Graph

Overlay Graphs

(continued)

Tornado Graphs
One of the easiest ways to understand the
results of sensitivity analysis is to use
tornado graphs
To create a tornado graph:
Right click on an output you are interested
in and select Tornado Graph
The most significant input is drawn on the
top of the tornado graph
The X-axis represents the percent change
in the output value
Each input variable is placed on the Y-axis
Positive and negative impacts are shown
on the right and left sides, respectively

Tornado Graphs

(continued)

Graphing Excel
There maybe times when you want to bring your
data to Excel or a different program for graphing
@Risk makes it easy to convert any graph to a
native chart format in Excel
For this purpose right click on any graph in @Risk
and select Graph in Excel
@Risk not only transfer the graph to an Excel
worksheet, but also transfer the source data

Take Away Points

We learned how to draw histograms and cumulative

graphs
We looked into real time updating graphs
We made summary graphs
We learned how to overlay graphs
We built tornado graphs
We transferred the graphs generated in @Risk to an
Excel worksheet

Advanced Features
Topics to discuss:
Fitting distributions to data
Special Risk functions
Correlating inputs
Multiple simulations

Fitting Distributions to Data

There maybe times when you have a set of
collective data which you want to use as the basis
for an input distribution
@Risk allows you to fit probability distributions to
existing data
You can use this feature by:
Click on Fit Distributions to Data in @Risk toolbar
Highlighting data, right clicking and selecting Fit
Distributions to Data from @Risk menu

Fitting Distributions to Data

(continued)
Data type: continuous versus discrete

Filtering data

Fitting Distributions to Data

(continued)
Alternative distributions fitted to data
and ranked based on goodness-of-fit

Selected dist. and

corresponding
parameters

Alternative goodnessof-fit tests available for

ranking: Chi-sq, A-D,
K-s

Results from
goodness-of-fit

Fitting Distributions to Data

(continued)

You can specify a distribution for fitting by clicking

on Specify a Distribution to Fit icon
When analyzing the fit, you can look at four
different graphs
A comparison graph
A difference graph
P-P plot
Q-Q plot

Goodness-of-fit information based on different

tests is also available

Special Risk Functions

@Risk includes a set of statistics functions that
can be entered directly into a spreadsheet model
These functions include desired statistics that are
updated in a real time during a simulation
This feature gives you the ability to build advance
models

Special Risk Functions

(continued)

Suppose you want to include the mean of the sale

volume in Cell D32 as a part of your model
You can simply enter =RiskMean(E32) in Cell
D32
This cell will simply include the mean of the
equation in the selected cell and will update as the
simulation runs
@Risk statistics functions include all the standard
statistics plus percentiles

Correlating Inputs
In most real life situations variables are not
independent
In such cases, the value of one variable affects the
value of another one
For example, when the temperature is high, air
condition usage is high
When modeling you need to take these
relationships into account otherwise you will
model scenarios that are do not make sense in
reality

Correlating Inputs

(continued)

@Risk allows you to take the relationships

between inputs into account by correlating input
variables
Open file Corrmat.xls from your example
directory
You have a model with 3 inputs in Cells D17 to D19
We want to correlate these input variables
according to correlation coefficients shown in the
matrix between Cells B12 and D14

Correlating Inputs

(continued)

The @Risk allows you to quickly create a

correlation matrix in defined values

First, you select an input for which

you want to define a correlation value
Click on the Define Correlation icon
This gives us a blank correlation
matrix to work with
You can enter correlation coefficients
between -1 and +1 into this matrix
When adding a correlation coefficient,
you can see the relationship between
the two inputs in the provided scatter

Correlating Inputs

(continued)

Scatter
plot
window

Selected
inputs

Correlation
coefficient
matrix

Correlating Inputs

(continued)

Add the following correlation into the matrix

IntRate & Pound/$: -0.7
IntRate & Mark/$: -0.5
Pound/$ & Mark/$: 0.6

Check how scatter plots change when adding

correlation coefficients
Click on Apply to assign the value
Remember correlation matrix is a symmetric
matrix. Thus, you only need to enter half the
values

Multiple Simulations or Sensitivity

Simulations
Some times you want to measure
the impact of particular value on
the simulation
For such cases you want to run a
simulation for each possible value
you want to try
In @Risk we call this as sensitivity
simulation
We can use function
RiskSimtable({v1,v2,,vn}) where

Multiple Simulations or Sensitivity

Simulations (continued)
Open file SenSim.xls
Use the RiskSimtable function for Cell D12
to evaluate four values (e.g., 25, 50, 75,
and 100) for price
Specify the number of simulations (i.e., 4)
in Simulation Settings
When starting the simulation, @Risk will
run 4 simulations back-to-back using 4
different values for the input in Cell D12
@Risk will provide results for all four
simulations allowing you to compare
results between different values of the

Multiple Simulations or Sensitivity

Simulations (continued)
You can use overlay graphs or
summary graphs to compare
results from different simulations

Take Away Points

We
We
We
We

learned how to fit a distribution to data

looked into special Risk functions
learned how to correlate inputs
learned how to run multiple simulations

Enhanced Define Distribution

Window
A number of significant enhancements are made
to the Define Distribution window
Distribution palette
Easy definition of distribution cell references
Easy access to overlay graphs for comparison with the
primary distribution

Enhanced Define Distribution Window

(continued)

Definition of
distribution
cell references

Distribution
palette

Adding
overlay

Alternate Distribution Parameters and

Quick Reports
There may be instances where you wish to
use particular distribution but you dont
have enough information to determine the
distribution parameters
For example, for experience you may know
that the Lognormal distribution best
describes the initial microbial
contamination but you dont have enough
information about the mean and standard
deviation
@Risk allows you to enter parameters as
percentile values giving you more

Alternate Distribution Parameters and Quick

Reports (continued)
To do this:
First click on the Define Distribution
value
Click on Alternate Parameters
Click on Percentile to enter actual
percentiles you are using (e.g., 10th
and 90th percentiles)
Now you can enter values for selected
percentiles instead of actual mean
and SD of the distribution

@Risk creates a distribution for

you based on the parameters you

Alternate Distribution Parameters and Quick

Reports (continued)

Alternate Distribution Parameters and Quick

Reports (continued)
You can have a one-step, preformatted report that summarizes
all critical risk analysis results
With a single click you can
generate a one-page report
containing a histogram, cumulative
curve, tornado diagram, and
summary statistics of simulation
results
In order to do so, after you are
done with the simulation, right

Alternate Distribution Parameters and Quick

Reports (continued)
Histogram

Cumulative curve
Summary
statistics

Tornado graph

@Risk Goal Seek

@Risk Goal Seek can find the value
of an input that needs to a desired
simulation result
Unlike Excel goal seek function
that is deterministic, @Risk goal
seek uses multiple simulations to
get results
You can set the target value or the
goal for a simulation statistic and
then tell @Risk which input to

@Risk Goal Seek

(continued)

As an example, open file VarGoalSeek.xls

This example analyzes return on a portfolio
investment
You are interested in buying puts (Cell D29) to
protect at least some of the shares of your
portfolio in order to reduce the risk of loss
You also want to make sure that the mean of your
return is 23% (This is your goal!) (Cell C34)

@Risk Goal Seek

Click the @Risk Goal
Seek button to invoke
this feature
Select the statistic you
will be setting your goal
for (e.g., mean)
Select the cell whose
goal you want to set
(i.e., Cell C34)
Enter the target value
for the simulating mean
for this cell (e.g., 23%)
Specify the cell to
adjust (i.e., D29)

(continued)

Goal Seek button

You can also set the goal

seek options such as

number of simulations
and accuracy level

Stress Analysis
@Risk Stress Analysis allows you
to analyze the effect of stressing
probability distributions
We may now control the values
sample from a distribution as you
may stress a portion of the
distribution
You can specify the percentile
values between which samples are
drawn during a simulation

Stress Analysis

(continued)

Stress Analysis also allows you to

stress your model by substituting
an entirely new distribution for an
existing distribution
This way you can test various
scenarios without changing your
model

Stress Analysis

(continued)

Open ClamsStress.xls
Suppose that an insurance company is
required by law to have enough money
on hand to pay all the claims with the
probability of 95% and that it can only set
aside $2000
However, standard Monte Carlo
simulations show us the maximum
payment is about $3500
The company wants to see what the
effect would be on claims if it took out
the insurance policy to cover an

Stress Analysis

(continued)

We would like to stress the

distribution representing the
number of claims to represent just
the 90th percentile and below
This will allow us to see if the
reserves on hand are enough to
cover 90% of possible claims
After completing the simulation,
the stress analysis provides you
with a collection of reports and

Stress Analysis
Stress Analysis Icon

Cell to monitor
Reference cell
for the input
distribution
Selecting the
range of an input
distribution to
stress

(continued)

Advanced Sensitivity Analysis

With advanced sensitivity analysis,
inputs can be any value or any
@Risk distribution function
The advanced SA function lets you
specify any member of the
distribution functions or static
worksheet cells to vary and let you
control how they vary
@Risk then runs any number of
simulations, one on each possible

Advanced Sensitivity Analysis

(continued)

Open HippoSensitivity.xls
We are simulating the profitability of the launch of
a new drug for hippos
We want to know if any of the fixed inputs (listed
in Cells C16:C20 and Cells E16:E20) can be
determined with greater precision, which one we
need to select
Advanced SA can help us decide which input to
focus on

Advanced Sensitivity Analysis

(continued)
Advanced SA
icon

Output cell to
monitor

Range of fixed
input cells for
advanced SA

Max and min change

values around the fixed
initial value

Advanced Sensitivity Analysis

(continued)
Specific statistic of
the output we want to
track
Options are:
variance, mean,
percentile, skewness,
etc.
Alternative
options to
include in the
report

Pause on Error
After working with @Risk for a little bit, it will
become very easy to make complex models with
nested cells and distribution functions
The logic of the complex models can be very
difficult to track specially given the variability of
many probability distribution functions
As a result, this in-depth analysis can lead to
violation of conditions of some of the output cells

Pause on Error

(continued)

@Risk includes a Pause on Error

feature which pauses the
simulation when an error is
recorded in an output cell
For example
Define a distribution in a cell as
[A1]=RiskNormal(2000,100)
Define the output value in a cell as
[A2]=RiskTriang(0,2000,A1)
Select Pause on Errors in Outputs in
Simulation Settings window
Run the simulation

Pause on Error

Name of the
output cell
with an error

(continued)

Related input cell

that caused the error

Value of the input cell that

caused the error