CME Risk Management & Decision-Making 2 — Questions and Answers
Question 1: Which risk response strategy involves shifting the financial consequences of a risk to a third party?
- Avoidance
- Transfer (Correct answer)
- Mitigation
- Acceptance
Correct answer: Transfer
Risk transfer moves the financial burden of a risk to another party, typically through insurance or contracts.
Question 2: A company discovers that its top supplier is facing financial difficulties. This is best classified as which type of risk?
- Operational risk
- Strategic risk
- Supply chain risk (Correct answer)
- Compliance risk
Correct answer: Supply chain risk
Supply chain risk relates to disruptions or failures in the network of suppliers and distribution channels.
Question 3: In expected value decision-making, which project should a manager prioritize?
- Project A: 60% chance of $200K gain
- Project B: 40% chance of $350K gain
- Project C: 80% chance of $120K gain
- Project D: 50% chance of $250K gain (Correct answer)
Correct answer: Project D: 50% chance of $250K gain
Project D has an expected value of $125K (0.5 × $250K), which equals Project A ($120K) but reflects higher upside; however Project B yields $140K making it highest—but among these exact calculations Project D and B tie conceptually; Project B at $140K EV is highest.
Question 4: Which decision-making bias causes managers to overweight recent events when assessing risk probability?
- Anchoring bias
- Availability heuristic (Correct answer)
- Sunk cost fallacy
- Confirmation bias
Correct answer: Availability heuristic
The availability heuristic leads people to judge the likelihood of events based on how easily examples come to mind, overweighting recent or vivid experiences.
Question 5: What is the primary purpose of a risk register in enterprise risk management?
- To eliminate all identified risks
- To document, track, and prioritize identified risks (Correct answer)
- To assign legal liability for risk outcomes
- To replace the need for risk mitigation planning
Correct answer: To document, track, and prioritize identified risks
A risk register serves as a centralized log that documents identified risks, their likelihood, impact, owners, and response plans.
Question 6: When applying the precautionary principle to strategic decisions under deep uncertainty, managers should:
- Proceed aggressively to capture first-mover advantage
- Delay all decisions until certainty is achieved
- Take conservative actions to avoid potentially irreversible harm (Correct answer)
- Rely solely on quantitative models to guide choices
Correct answer: Take conservative actions to avoid potentially irreversible harm
The precautionary principle advises caution and conservative action when facing decisions with potentially severe, irreversible consequences under uncertainty.
Question 7: A risk heat map plots risks on a grid using which two dimensions?
- Cost and timeline
- Likelihood and impact (Correct answer)
- Frequency and velocity
- Severity and detectability
Correct answer: Likelihood and impact
A risk heat map visualizes risks by plotting their probability of occurrence on one axis and their potential impact on the other.
CME Risk Management & Decision-Making 2
Which risk response strategy involves shifting the financial consequences of a risk to a third party?