Quantitative Risk Analysis Flashcards

In a Monte Carlo simulation for project risk, what does the 80th percentile of the cost distribution represent?

Answer: The cost value below which 80% of simulated outcomes fall

The 80th percentile means 80% of simulated outcomes produced a cost at or below that value, making it a confidence threshold.

Which correlation measure is most appropriate when assessing the relationship between two non-normally distributed risk variables?

Answer: Spearman rank correlation

Spearman rank correlation is non-parametric and does not assume normality, making it suitable for non-normal distributions.

A risk has a 5% annual probability of occurrence and a loss of $2 million. What is the annual expected loss (AEL)?

Answer: $100,000

AEL = probability × impact = 0.05 × $2,000,000 = $100,000.

In quantitative risk analysis, what is the primary purpose of a tornado diagram?

Answer: To rank input variables by their sensitivity impact on the output

A tornado diagram ranks variables from most to least influential on the output metric, identifying which risks drive the most uncertainty.

Which of the following best describes 'epistemic uncertainty' in quantitative risk analysis?

Answer: Uncertainty arising from lack of knowledge or data

Epistemic uncertainty stems from incomplete knowledge and can theoretically be reduced by gathering more information.

A lognormal distribution is commonly used to model financial losses because it:

Answer: Ensures values are positive and captures right-skewed loss distributions

Lognormal distributions are bounded at zero and positively skewed, making them well-suited for loss severities that cannot be negative.

In Extreme Value Theory (EVT), the Generalized Pareto Distribution (GPD) is used to model:

Answer: Losses that exceed a high threshold (tail events)

GPD models the distribution of excess losses beyond a given threshold, making it ideal for tail risk quantification.