@Risk Overview

JESSE H. JONES SCHOOL OF BUSINESS, RICE UNIVERSITY EL PASO CORPORATION FINANCE CENTER
What is @Risk?
@Risk is a Monte Carlo simulation plug-in for Excel. It allows you to test a variety of scenarios in a given model and determine the probability distribution of each outcome. When combined with a well-built model, it can give you a good feel for how likely a given outcome is for a modeled plan or business venture.

@Risk Toolbar

The Excel @Risk toolbar is divided into four sections which align fairly well with the steps used in building an @Risk-enabled model (described in the rest of this document). The Model section is used to identify the distributions of a models input values and label the output values; the Simulation section is used to configure and run your simulation; the Results section allows you to view results of the simulation once it has run; and the Tools section features help, @Risk global settings, and additional functionality.

Using @Risk Identify Inputs

The first step in adding @Risk functionality to a model is to identify the distributions of the models inputs (the independent variables whose values are uncertain). To do this, click on the cell where an input is located, and then click the Define Distributions icon on the @Risk toolbar. A window with a pictorial menu will appear listing the various distributions available in @Risk. Click the desired distribution, and then click Select Distribution at the lower right of the window. Enter the parameters for the distribution on the left side of the next window that appears. Optionally, you can enter in a name label (like MyInputName) for the input at the top of the distribution window this wont have any effect on your simulation but may make it easier to identify inputs in the results data that @Risk generates. Once you are finished, click OK. Repeat this for every input value in your model. The above process builds an @Risk Excel function and places it in each selected input cell. For example, =RiskNormal(0,10) is the formula for a normally distributed input that has a mean of 0 and a standard deviation of 10. The various kinds of distributions in @Risk each have a different function associated with them and have different parameters. With some experience, you may be able to key the desired distribution directly into the target cell and avoid using the Define Distributions icon. These functions can also be accessed through the Insert Function button. To shift the values produced by the input distribution, add the RiskShift function to the end of the distribution like this: =RiskNormal(0,10,RiskShift(-2)). Here, all generated values will have 2 subtracted from them. Additionally, you can give @Risk a placeholder value to keep in the input cell when the model isnt running by using RiskStatic like this: =RiskNormal(0,10,RiskStatic(3)).

Using @Risk Identify Outputs

The second step is to identify the models output variables. Select a calculated cell that represents an output and then click the Add Output icon. A window will pop up where you can optionally name the output variable (like MyOutputVariable), which may be useful when analyzing @Risks output statistics. Repeat this for every output value in your model. The effect of the Add Output icon is to add either RiskOutput() or RiskOutput(MyOutputVariable) to the target cells formula depending upon whether you gave the output a name. For example, a formula in the output cell may be =B2+B4. Once it is identified as an @Risk output, the formula will be =RiskOutput()+B2+B4. If desired, you can simply add RiskOutput() to a formula you want identified as an output instead of using the Add Output icon.

Using @Risk Run the Simulation

Using the simulation section of the toolbar, you can set up the global parameters under which the simulation will run. The first icon on the toolbar (Simulation Settings) brings up a menu that allows you to set how the simulation will behave while it is in action. Several of these settings, however, are exposed directly on the simulation toolbar. For example, you can type in the desired number of times the simulation runs in the Iterations field or pick a popular value from the dropbox. You can also use icons on the toolbar to choose whether the @Risk Output Graph or Results Summary windows are shown by default when the simulation is completed. Once you are satisfied with the settings, click the Start Simulation button.

Using @Risk View the Results

Depending upon the how you configured @Risk to behave during the previous step, some output windows and boxes may appear automatically. Regardless, you can access the various output screens by using the icons in the Results section of the toolbar. A few of the most popular output screens and the icons used to access them are shown below. The Browse Simulation Results icon toggles a window with a histogram of the values generated for a selected cell. To show the graph of a particular input or output, simply click on the Excel cell where the variable in question is stored. The Simulation Detailed Statistics icon exposes a window with summary results from the simulation including variable values at certain percentiles. The Simulation Data icon provides you with a table featuring a complete list of all values generated during the simulation. Most of the output graphs and charts are interactive, so feel free to click on various components to get a feel for what each might offer. The data and graphs that @Risk produces can also usually be output directly to Excel by using the Edit and Export icon at the bottom left of most results windows.

Correlation in @Risk
@Risk can also be used to factor in correlation between inputs by adding the RiskCorrmat function to the end of input distribution functions. For example, =RiskNormal(0,10) would become =RiskNormal(0,10, RiskCorrmat(Matrix, Position, Instance)), where Matrix is the correlation matrix, Position is the column coordinate of the corresponding variable in the correlation matrix, and Instance is an optional integer or text argument that allows you identify similarly correlated sets of variables. Instance is an important consideration when you want to work with several identical sets of inputs that correlate within a set but dont want correlation between sets. For example, the inputs in a multiyear portfolio model that has correlated investments should all use the same instance in a single year being modeled but there should be a different instance for each year. Correlations can also be entered by selecting the cells you want to correlate and then clicking on the Define Correlations icon.

Popular Statistics Functions

Once youve run your simulation, you can directly access statistics related to each input and output by using @Risk Excel functions. For example, if youd like to know the mean of the values generated for a variable in cell B4, youll use the function =RiskMean(B4). Alternatively, you can reference a variable using its name label as in =RiskMean(MyOutputVariable). Popular statistics functions and their usage can be found below.
RiskMin (Target Cell) RiskMax (Target Cell) RiskMean (Target Cell) RiskStdDev (Target Cell) RiskPercentile (Target Cell, Percentile) Ex: Ex: Ex: Ex: Ex: =RiskMin(B4) =RiskMax(B4) =RiskMean(B4) =RiskStdDev(B4) =RiskPercentile(B4,.95)