Tuesday, December 16, 2008

Pre-read for Portfolio and Monte Carlo Lecture

Dear Saint Mary's Professional MBA students,

I am looking forward to meeting you in class. Here is a brief description of my background.

I am Manager of Portfolio and Planning for Chevron Corporate Business Development. I have a BSc in Geophysical Engineering from Colorado School of Mines. I did exploration work for many years, but found myself attracted to the business side. I received an MBA from the University of St. Thomas in 1999, effectively completing a long gradual shift from the technical to the commercial and financial side of the business.

In the late 1990s, I built the cash flow model that we used in our new country entry into Brazil. I transferred to San Ramon in 2001, and since then, have been an advocate of portfolio methods and improved planning and decision methods at Chevron. My current position is responsible for ensuring that asset and corporate acquisitions will be a good fit with our corporate strategies.


Monte Carlo and Portfolio Management are important analytical fields in corporations. Monte Carlo deals with developing an understanding of uncertain outcomes of decisions. This can help companies better understand its risks and take steps to mitigate those risks.

Portfolio management focuses more on arriving at the decisions required to achieve targets, mitigate constraints, and manage performance. Portfolio is a tye of optimization that balances multiple competing objectives.

If the firm has incorporated risk and uncertaitny into its thinking around performance, Monte Carlo and portfolio techniques can be combined using Stochastic Optimization.

Please read the following articles before class:
Monte Carlo
General Monte Carlo Simulation
Crystal Ball Tool for Monte Carlo
Crystal Ball Resources and Free Trial Page
A Microsoft-centric take on Monte Carlo

Portfolio Decisions Pages on Real Portfolio Management
Portfolio Overview
What Is It?
Who Can Benefit?
How Can It Help You?
Various Approaches

Interesting take on financial modeling on Business Week (you may need a subscription to BW):
Financial Models Must Be Clean and Simple
If you don't have access, one of the key messages is the following 4 commandments:
• I will remember that I didn't make the world and that it doesn't satisfy my equations.
• Though I will use models boldly to estimate value, I will not be overly impressed by mathematics.
• I will never sacrifice reality for elegance without explaining why I have done so. Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights.
• I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension.

Suggested Further Reading List (for more information and insight):

Why Can't You Just Give Me the Number - Patrick Leach
This book is a great overview of advanced analytical techniques. He has good examples and solid background.

Executing Your Strategy - Malek, Morgan, Levitt
Fantastic book that ties management concepts of the last 50 years into a neat framework.

Against the Gods: The Remarkable Story of Risk – Peter L. Bernstein

Fooled by Randomness – Nassim Nicholas Taleb

The Black Swan – Nassim Nicholas Taleb

Business Portfolio Management - Michael S. Allen
Lays out a practical approach to portfolio management.

Judgment Under Uncertainty - Kahneman, Slovic, and Tversky
Classic book on cognitive biases