We need to define the key values we will need in any model to be able to arrive at the final conclusions. We have already seen examples of this. For example, while doing valuation, we need to identify what are the key inputs and assumption in our model. How are we projecting those. We also need to mention these or show them in a different color, so as to make sure that everyone understands what is an assumption, and what is data that is given.Stress TestingWhen a model has many inputs, they may start affecting the overall flow. It is therefore important to see if changes to one input are not affecting any other functionally anywhere. A model has to be stress tested to see if all linkages are working correctly, or not.DocumentationA financial Model is incomplete without some documentation about how the model flow moves. Documentation can be done in 3 ways:1. Using Name Manager _ Define Names for the Inputs such that understanding the model becomes easier.2. Using In Cell Comments _ Definning comments for any assumptions, so that a user can understand why those assumptions have been made.3. Using separate columns for comments, or using an entire sheet for documenting the key assumptions and Model Flow.A combination of the above can also be used.Two Asset PortfolioIf there is a portfolio with 2 assets, we already know the returns and standard deviation of this portfolio.Three Asset PortfolioExampleCalculate the Portfolio Standard DeviationCase 1Then, the find portfolio, subject to some conditions such as given below1. A client wants to create a 3 stock portfolio.2. Maximize Return3. The probability of a loss of more than 20 % should not be more than 10 %.Financial Modeling for Risk ManagementA Portfolio with 2 assetsA Portfolio with 3 assetsRisk Modeling in a multi asset portfolioMonte Carlo SimulationOption Payoff ModelingOptionsOptions are a kind of derivative instruements, where the holder of the option has a right but no obligation to buy or sell an asset.Unlike features _ where the buyer and the seller of the future enter into a contract for executing a transaction on a set date at a price _ the option, as the name signifies.