CRA Risk Mitigation Strategies & Decision-Making 2

Question 1

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?

Accepted Answer

$300,000

Answer

Expected value = probability × impact = 0.15 × $2,000,000 = $300,000, which exceeds the $280,000 premium, making insurance cost-effective.

Question 2

Which decision-making framework specifically accounts for ambiguity by distinguishing between situations where probabilities are known versus unknown?

Accepted Answer

Knight's distinction between risk and uncertainty

Answer

Frank Knight distinguished between risk (known probabilities) and uncertainty (unknown probabilities), which is foundational to modern risk decision-making frameworks.

Question 3

A risk manager implements a 'Swiss cheese model' for layered defenses. What is the PRIMARY purpose of this approach?

Accepted Answer

Ensure that multiple independent barriers prevent a loss event

Answer

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.

Question 4

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?

Accepted Answer

Embedding risk into capital allocation decisions

Answer

RAROC integrates risk measurement directly into capital allocation, ensuring that returns are evaluated relative to the economic capital consumed, embedding risk discipline into strategy.

Question 5

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:

Accepted Answer

Availability heuristic

Answer

The availability heuristic causes decision-makers to overweight recent or vivid events, distorting probability judgments away from objective base rates.

(CRA) Certified Risk Analyst Practice Test

(CRA) Certified Risk Analyst Practice Test

CRA Risk Mitigation Strategies & Decision-Making 2