BUSINESS ANALYTICS- FT REVIEWER BSAIS 3C
CHAPTER 1 – INTRODUCTION TO BUSINESS ANALYTICS
Business Analytics (BA) – The skills, technologies, practices for
continuously developing new insights and understanding of business
performance based on data and statistical methods.
Evolution of Business Analytics – It has its roots in operations
research, which was extensively used during World War II. Operations
research an analytical way to look at data to conduct military operations.
This technique started getting utilized for business and evolved into
management science. As the economies started developing, and
companies became more and more competitive, management science
evolved into business intelligence, decisions support systems, and into PC
software.
Significance and Usages of Business Analytics
- To make data- driven decisions
- Converts available data into valuable information
- Eliminate guesswork
- Get faster answer to questions
- Get insight into customer behavior
- Get key business metrics reports when and where needed
Impact of Business Analytics to an Organization
- Improve profitability of the business
- Increase market share and revenue
- Provide better return to a shareholder
- Reduce overall cost
- Sustain in competition
- Monitor KPIs (Key Performance Indicators)
- React to changing trends in real time
Challenges for Business Analytics
- Depends on sufficient volumes of high quality data
- Difficulty in ensuring data quality
- Data warehousing require a lot more storage space than it did
speed
- Becoming a tool that can influence the outcome of customer
interactions
- Technology infrastructure and tools must be able to handle the
data and Business Analytics processes.
- Organizations should be prepared for the changes that
Business Analytics bring to current business and technology
operations.
SCOPE OF BUSINESS ANALYTICS
- Descriptive Analytics – performs the function of “describing”
or summarizing raw data to make it easily understandable and
interpretable by humans. It finds answer to the question “What
has happened in the past?”
- Predictive Analysis – helps in predicting the future course of
events and taking necessary measures for the same. It uses
forecasting techniques and statistical models to find out “What
is going to happen in the future?”
• Predictive Modelling – uses statistics to predict
outcomes.
• Machine Learning (ML) – is the scientific study of
algorithms and models that computer systems use
to perform a specific task without using explicit
instructions, relying on patterns and inference
instead.
- Prescriptive Analysis – allows users to recommend several
different possible solutions to the problem and to guide them
about the best possible course of action. It makes use of
optimization and simulation algorithms to find answer to the
question “What should we do?”
Users of Business Analytics
1. Students
2. Businessmen
3. Accountants and Auditors
4. Organizations/Companies/Group of Industries/Small Firms
Main Software Used for Business Analytics
1. MS-EXCEL
2. SPSS
3. R
4. SAS
5. E-views
THE BUSINESS ANALYTICS PROCESS
COMPONENTS OF BUSINESS ANALYTICS
1. Data Mining – create models by uncovering previously
unknown trends and pattern in vast amounts of data.
2. Text Mining – discover and extract meaningful patterns and
relationships from text collections.
3. Forecasting – analyze and forecast processes that take place
over a period of time.
4. Predictive Analytics – create, manage, and deploy predictive
scoring models.
5. Optimization – use of simulations techniques to identify
scenarios which will produce best results.
6. Visualization – enhanced exploratory data analysis and output
of modelling results with highly interactive statistical graphics.
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CHAPTER 2 – LENDING ANALYTICS
Lending Analytics – these new data sources include things like
transaction history in savings and checking accounts as well as spending
patterns that help predict income and identify positive signs of
creditworthiness. With the help of lending analytics, lenders gain a more
detailed picture of their potential customers, strengthen their risk
assessment models and can reach a wider range of customers.
ROLE OF DATA ANALYTICS IN LENDING SECTOR
1. Selection of Customers – help businesses identify
customers’ spending patterns, financial behavior, and the types
of services they are most likely to choose.
2. Creation of Offer – if the rate of interest, tenure and amount
is customized to the individual level, businesses can achieve
optimized loan allocation and pricing.
3. Probability of Delinquency – sometimes, borrowers, who
appear as the perfect candidate based on their past behaviors,
can show erratic payment and financial behavior once their
loan is approved.
4. Collection Strategies – lending institutions can apply data
analytics to customer data to better understand their behavior
and characteristics to maximize collection yields from each of
them.
5. Probability of Fraud – credit fraud has been one of the biggest
concerns of banks and other lending businesses.
6. Workflow Automation via ML Models – ML models can help in
decision making for every workflow predefined by the bank.
EXAMPLES OF LENDING ANALYTICS
Nucleus Lending – is an easy-to-build platform that helps to make better
credit decisions through accurate predictive models.
NetOxygen P.U.L.S.E (Production Unified Lifecyle Statistical
Evaluator) – is an on-the-go colud-based analytics application for
seamless reporting, dashboarding, and business intelligence, designed
specifically for the next generation of lenders’ executive and management
staff.
Predictive Analytics – refers to the use of statistics and modelling
techniques to make predictions about future outcomes and performance.
It is also useful for businesses to help them manage inventory, develop
marketing strategies, and forecast sales.
MACHINE LEARNING
1. Supervised Machine Learning – defined by its use of labeled
datasets. These datasets are designed to train or “supervise”
algorithms into classifying data or predicting outcomes
accurately.
2. Unsupervised Machine Learning – uses machine learning
algorithms to analyze and cluster unlabeled data sets. These
algorithms discover hidden patterns in data without the need
for human intervention.
PREDICTIVE MODELING
1. Classification Models – are a subset of supervised machine
learning. A classification model reads some input and
generates an output that classifies the input into some
category.
2. Clustering Models – fall under unsupervised learning. They
group data based on similar attributes.
3. Time series Models – use various data inputs at a specific
time frequency, such as daily, weekly, monthly, etc. It is
common to plot the dependent variable over time to assess the
data for seasonality, trends, and cyclical behavior, which may
indicate the need for specific transformations and model types.
Regression – if there is a link between the input variable and the output
variable, regression procedures are applied. It is used to forecast
continuous variables such as weather, market trends, and so on.
Classification – when the output variable is categorical, such as Yes-No,
Male-Female, True-False, Normal–Abnormal, and so on, classification
methods are used.
Logistic Regression – is a type of statistical model that is often used for
classification and predictive analytics. It estimates the probability of an
event occurring, such as voted or didn’t vote, based on a given dataset of
independent variables.
TYPES OF LOGISTIC REGRESSION
1. Binary Logistic Regression – is the response or dependent
variable is dichotomous in nature.
2. Multinomial Logistic Regression – is the dependent variable
that has three or more possible outcomes.
3. Ordinal Logistic Regression – is the response variable that
has three or more possible outcomes, but in this case, these
values do have a defined order.
USE CASES OF LOGISTIC REGRESSION
1. Fraud Detection – it can help teams identify data anomalies,
which are predictive of fraud.
2. Disease Prediction – In medicine, this analytics approach can
be used to predict the likelihood of disease or illness for a given
population.
3. Churn Prediction – Specific behaviors may be indicative of
churn in different functions of an organization.
USES OF PREDICTIVE ANALYTICS IN VARIOUS INDUSTRIES
1. Banking – financial services use machine learning and
quantitative tools to predict credit risk and detect fraud.
2. Healthcare – used to detect and manage the care of
chronically ill patients, as well as to track specific infections
such as sepsis.
BUSINESS ANALYTICS- FT REVIEWER BSAIS 3C
3. Human Resources (HR) – HR teams use predictive analytics
and employee survey metrics to match prospective job
applicants, reduce employee turnover and increase employee
engagement.
4. Marketing and Sales – enables companies to be more
proactive in the way that they engage with their clients across
the customer lifecycle.
5. Supply Chain – to manage product inventory and set pricing
strategies. It helps companies meet customer demand without
overstocking warehouses.
BENEFITS OF PREDICTIVE MODELING
1. Security – every modern organization must be concerned with
keeping data secure.
2. Risk Reduction – most businesses are working to reduce their
risk profiles.
3. Operational Efficiency – more efficient workflows translate
to improved profit margins.
4. Improved Decision Making – can provide insight to inform the
decision-making process and offer a competitive advantage.
CHAPTER 3 – RECOMMENDATION ANALYTICS
BIG DATA – refers to an extremely large volume of data and data sets
that include structured and unstructured data coming in from multiple
sources.
Recommendation System – is a class of machine learning that uses data
to help predict, narrow down, and find what people are looking for among
an exponentially growing number of options.
TYPES OF RECOMMENDATION SYSTEM
1. Collaborative Filtering – recommend items based on
preference information from many users.
• User-user Collaborative Filtering – is based on
searching for similar customers and offering
suggestions based on similar ones. This algorithm is
very effective but takes a lot of time and resources.
• Item-item Collaborative Filtering – searches for
similar items based on items users have previously
liked or positively interacted with.
2. Content Filtering – uses the attributed or features of an item
to recommend other items similar to the user’s preferences.
3. Hybrid Filtering – can depend on content-based
recommendations when a user/item has no or little activity
and become more accurate as more data are available.
Mass Customization – is the process of delivering market goods and
services that are modified to satisfy a specific customer’s needs. It is a
marketing and manufacturing technique that combines the flexibility and
personalization of custom-made products with the low unit costs
associated with mass production.
TYPES OF MASS CUSTOMIZATION
1. Transparent Customization – provides individual customers
with unique goods or services without letting them know
explicitly that those products and services have been
customized for them.
2. Collaborative Customization – conduct a dialogue with
individual customers to help them articulate their needs, to
identify the precise offering that fulfills those needs, and to
make customized products for them.
3. Adaptive Customization – offer one standard, but
customizable, product that is designed so that users can alter
it themselves.
4. Cosmetic Customization – present a standard product
differently to different customers.
ADVANTAGES AND DISADVANTAGES OF MASS CUSTOMIZATION
ADVANTAGES DISADVANTAGES
Increased Customer Complexity and
Satisfaction Cost
Improved Loyalty Limited Scale
Better Data Insights Quality Control
Greater Efficiency Security Concerns
Regression – is a statistical method which allows us to predict a
dependent output variable based on the values of independent input
variables.
• Linear Regression – is a machine learning model that is used
to predict the values of output variables based on the value of
input variables. It aims to find the relationship between input
and output variables by plotting a line which best fits the data
given to it.
• Logistic Regression – is a classification algorithm which is
used to predict the category of a dependent variable based on
values of independent variables. Its output is 0 or 1.
K-Nearest-Neighbor Algorithm (K-NN) – is an approach to data
classification that estimates how likely a data point is to be a member of
one group or the other depending on what group the data points nearest
to it are in.
BUSINESS ANALYTICS- FT REVIEWER BSAIS 3C
CHAPTER 4 – HEALTHCARE ANALYTICS
Predictive Analytics in Healthcare – provides benefits mainly in clinical
care, administrative tasks and operational management.
USE CASES OF PREDICTIVE ANALYTICS IN HEALTHCARE
1. Disease Progression and Comorbidities – healthcare
institutions are using predictive analytics to identify patients
whose conditions might worsen.
2. Hospital Overstays – healthcare organizations also use
predictive analytics to identify which hospital inpatients are
likely to exceed the average length of stay for their conditions
by analyzing patient, clinical and departmental data.
3. Hospital Readmissions – identifies patients at high risk of
hospital readmission. Forecasting which patients may be
readmitted after a hospital stay allows clinicians to adjust their
post-hospitalization treatment plans, noting that reducing
readmissions saves money, preserves healthcare resources
for new patients and improves patient outcomes.
4. Resource Allocations – identifies patterns in resource
allocations and predict future needs, thereby enabling
administrators to acquire or move the right resources to the
right place at the right time.
5. Resource Acquisitions – identifies what additional resources
would most likely be needed based on data points like seasonal
needs, expected demographic changes and patient populations.
BENEFITS OF PREDICTIVE ANALYTICS IN HEALTHCARE
1. Improved Patient Outcomes – predictive analytics is being
used to identify optimal treatment plans, medication regimens,
and engagement material, as well as predict disease
progression and likely comorbidities in a limited number of
cases today.
2. More Consistent Care Among Patients – the use of
predictive analytics can help ensure that expert insights are
equally distributed among patients.
3. Operations Efficiency and Cost Savings – predictive
analytics enables earlier and more effective medical
interventions, as well as more efficient healthcare
administration and operations management resulting in cost
reductions.
AID OF HEALTHCARE ANALYTICS TO PEOPLE
1. Preventive Care – predictive analytics engines can predict
large-scale patterns in healthcare and medical needs, such as
how many flu vaccines a particular area will require that
season.
2. Patient Satisfaction – when patients utilize care providers
that leverage predictive analytics, they receive the added
benefits of lower facility costs and proper scheduling.
3. Development of New Medicine – helps researchers develop a
better understanding of what combinations of compounds or
medications might work on certain conditions so they can more
narrowly target their research.
CHAPTER 5 – FINANCIAL ANALYTICS
Financial Analytics – is the field that provides high- and granular-level
views of a company’s financial data, helping to improve its business
performance. It provides differing perspectives on the financial data of a
given business, giving insights that can facilitate strategic decisions and
actions that improve the overall performance of the business.
6 KEY FINANCIAL DATA ANALYTICS
1. Cash flow – real-time indicators to determine how much cash
is coming in and going out on a day-to-day basis, as well as how
much you need to keep your business running smoothly.
2. Customer Profitability – data that ensures you have enough
customer sales by breaking down your customer segments and
analyzing each customer’s cumulative value.
3. Predictive Sales – these analytics plan the success of your
sales forecast and possible ways to improve predictions for the
future.
4. Product Profitability – data that uncovers which products are
profitable, while making sure to appropriate the right costs
across various products that may share production processes
or cost bases.
5. Shareholder Value – these analytics are a calculation of a
company’s value made through the returns you’ll provide to
your shareholders.
6. Value Driver – these key indicators ensure your business is
on the right track to meet all your short- and long-term goals.
Backtesting – is the general method for seeing how well a strategy or
model would have done ex-post. Backtesting assesses the viability of a
trading strategy by discovering how it would play out using historical data.
In-Sample Test – is simply the testing you do on your available data. It’s
the data you use to confirm or falsify your hypothesis. A within sample
forecast utilizes a subset of the available data to forecast values outside
of the estimation period and compare them to the corresponding known
or actual outcomes. This is done to assess the ability of the model to
forecast known values.
Out-of-Sample Test – is testing your trading strategy on unknown data.
An out of sample forecast instead uses all available data in the sample to
estimate a model.
Sample Validation – is when you confirm your trading idea or hypothesis
via an out-of-sample test.
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Demo-Account – allows users to buy and sell stocks using paper trading,
but test those trades under real, live market situations.
Incubation – is the process of demo trading your strategy.
CHAPTER 6 – SPORTS ANALYTICS
Sports Analytics – is the analysis of sports data, including components
of sports such as player performance, business operations, and
recruitment.
Components of Sports
1. Player Performance
2. Business Operations
3. Recruitment
TWO COMPONENTS OF SPORTS ANALYTICS
1. On-Field Data Analytics – involves tracking key on-field data
metrics to influence methodologies that may be used to
improve in-game strategies, nutrition plans, and other vital
areas that could ethically boost athletes’ performance levels.
2. Off-Field Data Analytics – the focus is on the business side of
sports. It involves monitoring important off-field data metrics
such as ticket sales, merchandise sales, fan engagement, etc.
This type of data analytics seeks to assist decision-makers in
sporting teams make better decisions directed toward
increased growth and profitability.
Benefits of Data Analytics in Sports
1. Informed Decision-making
2. Increased Revenue
Predictions that can made under Sports Analytics
1. Injury Predictions
2. Player Valuations
3. Team Strategy
4. Evaluating Ticket Churn
5. Ticket Pricing
6. Sports Betting
Sports Data Analyst- they collect and analyze sports data, then update
individual players, coaches, or team managers who use this data to make
informed decisions during or before sports competitions.
Role of Sports Analyst
1. Business, where data is used to improve the performance of a
team or sports organization.
2. Deals with the entertainment aspect and provides fans with
details they want to know about athletes.
Workplaces of Sports Analysts
1. Professional and College Sports Programs
2. Sport Media Companies
3. Wearable Technology Companies
4. Training Technology Companies
5. Human Performance Labs
6. Sports Gambling Industry
Daily Fantasy Sports (DFS) – is a type of online game where players
build a team of real-life athletes and compete against other players in a
single day or week-long contest.
Top DFS Sites
1. DraftKings
2. FanDuel
DFS: Skill vs. Luck – So far, there haven’t been any empirical
investigations as to whether DFS is really a skill game. Despite the fact
that skill in games has to be measured relatively, that is, relative to the
skill of other players, Luck is certainly present to a certain extent.
However, skill plays a greater role in determining the outcome, and this
is evident especially at the top of the leaderboard.
Shrinkage Method – is the loss of inventory. Shrinkage is the difference
between recorded inventory on a company's balance sheet and its actual
inventory. This concept is a key problem for retailers, as it results in the
loss of inventory, which ultimately means loss of profits.
CHAPTER 7 – RETAIL ANALYTICS
Retail Analytics – is the process of providing analytical data on inventory
levels, supply chain movement, consumer demand, sales, etc., that are
crucial for making marketing and procurement decisions. It is the process
of collecting and studying retail data (like sales, inventory, pricing, etc.)
to discover trends, predict outcomes, and make better, more profitable
business decisions.
Types of Retail Analytics
1. Descriptive Analytics
- Uses data to describe “what” is happening in your
business. It helps retailers organize their data to tell a
story.
2. Diagnostic Analytics
- Helps retailers use data to answer the “why” of specific
business problems. Diagnostic Analytics uses statistical
analysis, algorithms, and sometimes, machine learning, to
drill deeper into the data and find correlations between
data points.
3. Predictive Analytics
BUSINESS ANALYTICS- FT REVIEWER BSAIS 3C
- This tells you “what’s next?”. Effective predictive analytics
uses findings from both descriptive and diagnostic
analytics to forecast the future.
4. Prescriptive Analytics
- It is the most advanced type and can tell retailers ‘what
you should do next?” to get the best results.
Examples of Retail Data Analytics Application
1. Business Intelligence
- BI tools help structure and visualize data.
2. Sales Forecasting
- is the process of looking at historical sales data, finding
trends, and projecting them into the future to predict
sales.
3. Demand Forecasting
- uses a much broader range of data to calculate the
demand for each product, at each store, at specific time
intervals.
4. Unified Advanced Retail Analytics
- is the most powerful form of analytics that can produce
the highest ROI if applied correctly. It aims to combine the
benefits of business intelligence, powerful diagnostics,
and accurate demand forecasting with intelligent
automation that recommends the most profitable actions
across the business.
CHAPTER 8 – PENSION ANALYTICS
Simulation – is an ongoing replica of how a system or process might
work in the actual world. It is a tool used to evaluate decisions in the
presence of uncertainty.
Use Cases of Simulation in Business Analytics
1. Testing different marketing strategies
2. Assessing the impact of new product
3. Evaluating the financial impact of different decisions
4. Planning for future growth
5. Managing risks
Advantages of Using Simulation in Business Analytics
1. Simulation can help businesses understand their processes
and identify potential improvements.
2. Businesses can test out new ideas and see how they would work
in the real world via simulations.
3. Finding bottlenecks and inefficiencies in business processes is
achievable via simulations.
4. Simulation can help businesses train employees on new
processes or procedures.
5. Simulation saves time and money by avoiding costly trial and
error.
Models Used in Simulation
1. Monte Carlo Method
- The name Monte Carlo comes from roulette, a game made
famous at Monte Carlo resorts. The roulette wheel has 37
slots numbered 0 to 36, with 18 red slots, 18 black slots
and one green slot. Players have a 48.65% chance of
getting a red vs. black slot and a 2.7% of a green slot (the
0). The three chances represent one distribution.
2. Agent-based Model
- Anyone who has watched a flock of birds take off has seen
seemingly random initial behavior give way to a
synchronized activity, with birds flying in a distinct
formation even if no one bird controls their activity. Birds
in flight have developed simple rules that tell them what
to do based on what they see around them. Each bird
avoids obstacles as it flies, and adjusts its position, in real
time, based on the location of birds around it.
3. Discrete Event Simulation
- Data analysts use discrete event simulations in areas
where proximity determines a grid's state or space. For
instance, most weather modeling systems take advantage
of voxels -- three-dimensional cells -- to determine the
inputs and outputs to each cell based on previous states.
4. System Dynamic Modelling
- In an ideal mathematical world, it should be possible to
describe the world with independent functions, meaning
that they can be treated as if they were linear. In reality,
most variables that describe systems are coupled with
one another -- changing the value of one variable may
change another variable due to their interaction. These
are nonlinear systems derived from differential
equations.
CHAPTER 9 – SALESFORCE ANALYTICS
Decision Optimization – is an analytics process that tries to find the best
solution among various alternatives. It is a branch of mathematics that
tries to maximize the output from a large set of input variables, each of
which might exert a unique influence on the output.
Decision Optimization Methodology
1. Understand the overall concept of your system.
2. Define the goals.
3. Identify variables (things that can be controlled) and the
constraints (the things beyond control).
4. Identify the controllable inputs and outputs.
5. Specify all quantities mathematically.
6. Run the model.
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7. Check model for completeness, cleanliness, and correctness. - The pharma industry has numerous requirements that
8. Test, experiment, fine-tune, collect feedback, and continue vary in organizations, regions, and customers. As the
perfecting the process. industry needs sales, representatives must deeply
understand the needs of promoting products. Salesforce
Salesforce Analytics – is a cloud-based platform that provides
features like account management, sales models, and
businesses with real-time insights into their data. Salesforce analytics
closed-loop strategies boost the efficiency of Salesforce.
can be used to analyze sales data, identify sales trends, and optimize sales
representative assignments based on the identifies trends.
Reasons to use Salesforce CRM to maximize output in a
Ways in which Salesforce Effectiveness shapes Pharmaceutical
Pharmaceutical Company
Industry
1. To track down opportunities.
1. Easy access to health professionals.
2. To reach out and target new customers.
- Salesforce can determine what the leads are interested
3. Implement better marketing solution.
in and the way to turn them into customers.
4. Staying prepared for the future.
2. Leveraging communication channels.
5. Know what has changed.
- These days customers are present in every social forum,
and it is quite impossible to trace customers through all CHAPTER 10 & 11 – PORTFOLIO ANALYTICS
your social networking sites. The best part about
Portfolio Analysis – is used to make decisions regarding the range of
Salesforce is that it is customizable, and you can witness
products offered by a company. It can evaluate individual areas of the
your leads turning into customers.
company’s activity and indicate both those that may be the source of our
3. Dealing with demarcating product loss.
competitive advantage and those that don’t bring the expected results.
- Sometimes, several marketing representatives of the
same pharmaceutical company visit physicians for sales. BCG Matrix – A popular portfolio method that was established in 1969 by
But this approach can become a failure as the same Boston Consulting Group used to analyze the management of business
company reps compete in promoting their products. To units. Its goal is to properly allocate the funds to individual areas of the
avoid such a situation, you should access a Salesforce company. It determines which products should remain in their range,
development company for implementing the platform in withdrawn, and have the potential to be profitable in the future. It
your organization. categorizes products into four (question marks, stars, dogs, and cash-
4. Cost reduction cows).
- Salesforce utilizes numerous communication channels
that differ in costs. Face-to-face communication is a
costlier mode of communication as the representatives
have to travel to visit. This mode is costlier compared to
other channels such as email, phone, etc.
5. Targeting new customers.
- The promotion of pharmaceutical products has always
been targeted to physicians. But nowadays, even the
nonphysician customers are using products like patients,
payers, and pharmacists. For boosting the market share,
pharmaceutical companies should start providing
promotional efforts for new kinds of customers.
6. Easier niche marketing
- For every product and drug, the target audience across Portfolio Analytics – is the application of analytical methods to the
several regions varies. It becomes important to change evaluation and management of investment portfolios. The objective of
drugs with the transforming demographics. Salesforce is portfolio analytics is to provide insight into the risk and return
customizable depending on the fluctuation in characteristics of investment portfolios, as well as to identify
demographics. opportunities for improvement in portfolio performance. It is a subset of
7. Creating valuable marketing strategies
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business analytics that involves analyzing and managing a collection of
investments or assets, known as a portfolio.
Key metrics used in Portfolio Analytics
1. Return – The percentage change in the value of the portfolio
over a given time period.
2. Risk – The variability of returns, typically measured by
standard deviation.
3. Sharpe Ratio – A measure of risk adjusted return that takes
into account the portfolio's volatility relative to a benchmark.
4. Beta – A measure of the portfolio's sensitivity to changes in
the overall market.
5. Alpha – A measure of the portfolio's performance relative to
its benchmark, after adjusting for risk.
Optimizing with Multiple Objectives
1. Multi-objective Optimization
- The portfolio manager must specify the relative
importance of each objective, and the optimizer will
generate a set of portfolios that trade-off between the
different objectives.
2. Pareto Optimization
- involves identifying the set of portfolios that are optimal
for each objective, and then selecting the portfolio that
provides the best trade-off between the objectives.
3. Constraint-based Optimization
- This approach allows portfolio managers to incorporate
specific investment guidelines or risk management
objectives into the optimization process.
4. Robust Optimization
- It involves optimizing the portfolio to perform well under
a range of different market scenarios or uncertainties.
This approach can help to mitigate the risk of unexpected
market events or changes in economic conditions.
Decision making in the presence of multiple objectives
1. Multi-Criteria Decision Analysis
- Is about making decisions when multiple criteria (or
objectives) need to be considered together in order to
rank or choose between alternatives.
2. Sensitivity Analysis
- Is a tool used to analyze how the different values of a s
set of independent variables affect a specific dependent
variable under certain specific conditions.
3. Scenario Analysis
- Is a technique that provides a rational and structured way
to analyze the future. Businesses can use it to examine
different potential impacts of negative and positive
events.
4. Bayesian Decision Analysis
- Is a statistical method that allows researchers (decision
makers) to take into account data as well as prior beliefs
to calculate the probability that an alternative (decision,
treatment) is superior.
Portfolio Management – is the process of selecting and managing a
portfolio of assets to achieve a specific investment objective.
- Asset Allocation
- Security Selection
- Portfolio Construction
- Portfolio Monitoring
- Risk Management
Pitfall to keep in mind in Portfolio Management
1. Assumptions and limitations of the model
2. Historical data bias
3. Overfitting
4. Outliers and extreme events
5. Subjective inputs
Key Components of Portfolio Analytics
1. Portfolio Composition – analyzing the composition of a
portfolio, including the types of assets, their allocation, and
diversification.
2. Risk Analysis – assessing the risk associated with each
investment in the portfolio, including factors such as volatility,
correlation, and potential losses.
3. Performance Evaluation – evaluating the historical and
current performance of the portfolio, including returns, risk-
adjusted metrics, and benchmarking against industry
standards.
4. Optimization – using mathematical and statistical techniques
to optimize the portfolio allocation to achieve the desired risk-
return profile.
5. Scenario Analysis – conducting what-if scenarios to assess
the potential impact of changes in market conditions or
portfolio composition on the portfolio's performance.
Real-World Applications of Portfolio Analytics
1. Investment Management – is widely used in the field of
investment management, where it helps portfolio managers
optimize their portfolios, make informed investment decisions,
and manage risks effectively.
2. Wealth Management – is also used to analyze and optimize
investment portfolios for high-net-worth individuals and
families, aiming to achieve their financial goals and objectives.
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3. Risk Management – is utilized in risk management to assess 4. Capital Asset Pricing Model (CAPM) – is used to calculate
and manage the risk associated with investment portfolios, the expected return of an asset based on its level of risk.
such as identifying potential risks and developing risk 5. Value at Risk (VaR) Model – is used to measure the maximum
mitigation strategies. potential loss of a portfolio over a specified time period with a
4. Pension Fund Management – is used in managing pension given level of confidence.
funds.
Advantages of DSS
Decision Support System (DSS) – is a computer program application 1. Improved decision-making
used to improve a company’s decision-making capabilities. It brings 2. Increased efficiency
together data and knowledge from different areas and sources to provide 3. Better risk management
users with information beyond the usual reports and summaries. 4. Enhanced communication

DSS Components Disadvantages of DSS

1. Complexity
1. Knowledge Base – is an integral part of a decision support
2. Data Quality
system database, containing information from both internal
3. Cost
and external sources.
4. Over reliance
2. Software System – is composed of model management
systems.
3. User Interface – enables easy system navigation. The primary
goal of the decision support system's user interface is to make
it easy for the user to manipulate the data that is stored on it.
Types of DSS

1. Data-driven DSS – is a computer program that makes

decisions based on data from internal databases or external
databases.
2. Model-driven DSS – are customized according to a predefined
set of user requirements to help analyze different scenarios
that meet these requirements.
3. Communication-driven and group DSS – uses a variety of
communication tools -- such as email, instant messaging or
voice chat -- to allow more than one person to work on the
same task.
4. Knowledge-driven DSS – the data that drives the system
resides in a knowledge base that is continuously updated and
maintained by a knowledge management system.
5. Document-driven DSS – is a type of information management
system that uses documents to retrieve data.

Models of DSS

1. Mean-Variance Analysis Model – is used to optimize portfolio

performance by balancing expected return and risk through a
combination of assets.
2. Black-Litterman Model – uses Bayesian inference to
incorporate both historical data and investor views into the
portfolio optimization process.
3. Monte Carlo Simulation Model – is used to simulate the
performance of a portfolio under various market conditions.