Risk Mitigation Strategies & Decision-Making Flashcards
7 cards from real CRA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Mitigation Strategies & Decision-Making flashcards as text
A company faces a 15% probability of a $2M loss from a supplier default. The annual insurance premium to cover this risk is $280,000. What is the expected value of the uninsured loss?
Answer: $300,000
Expected value = probability × impact = 0.15 × $2,000,000 = $300,000, which exceeds the $280,000 premium, making insurance cost-effective.
Which decision-making framework specifically accounts for ambiguity by distinguishing between situations where probabilities are known versus unknown?
Answer: Knight's distinction between risk and uncertainty
Frank Knight distinguished between risk (known probabilities) and uncertainty (unknown probabilities), which is foundational to modern risk decision-making frameworks.
A risk manager implements a 'Swiss cheese model' for layered defenses. What is the PRIMARY purpose of this approach?
Answer: Ensure that multiple independent barriers prevent a loss event
The Swiss cheese model (Reason's model) uses multiple overlapping defensive layers so that when one layer has a 'hole,' other layers prevent the hazard from reaching an outcome.
An organization's board requires that all strategic decisions exceeding $5M use a formal risk-adjusted return on capital (RAROC) analysis. This policy BEST reflects which principle?
Answer: Embedding risk into capital allocation decisions
RAROC integrates risk measurement directly into capital allocation, ensuring that returns are evaluated relative to the economic capital consumed, embedding risk discipline into strategy.
During a crisis, a decision-maker relies heavily on the most recent dramatic failure rather than historical base rates. This cognitive error is known as:
Answer: Availability heuristic
The availability heuristic causes decision-makers to overweight recent or vivid events, distorting probability judgments away from objective base rates.
A firm uses a 'risk appetite statement' that sets a maximum tolerable Value at Risk (VaR) of $10M at the 99% confidence level. A proposed project shows a 99th-percentile loss of $12M. The CORRECT action under this framework is to:
Answer: Reject or restructure the project to bring VaR within appetite
The risk appetite statement is a binding constraint; a project exceeding the stated VaR limit must be rejected or redesigned to fit within approved tolerance.
Which mitigation technique involves redesigning a business process to eliminate the source of risk entirely, rather than controlling or transferring it?
Answer: Risk avoidance
Risk avoidance eliminates the activity or condition that creates the risk, removing exposure at the source rather than managing consequences.