Financial Management for Project Managers Risk Management 4 — Questions and Answers
Question 1: A project's cost estimate has a P80 value of $2.4M and a P50 value of $2.1M. A risk-averse sponsor prefers to fund the project at which level?
- P50 ($2.1M)
- P80 ($2.4M) (Correct answer)
- The average of P50 and P80
- The mode of the cost distribution
Correct answer: P80 ($2.4M)
Funding at P80 means there is an 80% probability that actual costs will not exceed that amount, providing a larger buffer for a risk-averse sponsor.
Question 2: Which of the following is an example of a 'residual risk'?
- A new risk created by the risk response plan
- The remaining exposure after a risk response has been implemented (Correct answer)
- A risk identified after the project has closed
- An unquantified risk with no owner assigned
Correct answer: The remaining exposure after a risk response has been implemented
Residual risk is the level of exposure that remains after a risk response has been applied.
Question 3: A project manager notices that actual cost variance is consistently negative across multiple reporting periods. From a risk management perspective, this MOST likely indicates:
- An unidentified risk has materialized and is affecting costs (Correct answer)
- The risk register is complete and all risks are under control
- The project is performing better than planned
- Contingency reserves are adequate
Correct answer: An unidentified risk has materialized and is affecting costs
Persistent negative cost variance (spending more than planned) often signals that an unplanned risk event is impacting the project.
Question 4: When using a probability and impact matrix, a risk rated 'High' probability and 'High' impact would typically require which response approach?
- Passive acceptance
- Workaround development
- Aggressive response planning (avoid, transfer, or mitigate) (Correct answer)
- Deferral to a later project phase
Correct answer: Aggressive response planning (avoid, transfer, or mitigate)
High/High risks represent the greatest threat to project objectives and demand proactive, aggressive response strategies.
Question 5: A project manager calculates that fixing a defect after delivery will cost $500,000 but preventing it during development costs $50,000. This analysis is BEST described as:
- Cost-benefit analysis of risk response options (Correct answer)
- Net present value comparison
- Break-even analysis
- Sensitivity analysis
Correct answer: Cost-benefit analysis of risk response options
Comparing the cost of prevention versus the cost of failure is a cost-benefit analysis used to justify proactive risk responses.
Question 6: A risk trigger (also called a 'risk symptom' or 'warning sign') is BEST used to:
- Calculate the EMV of a risk event
- Signal that a risk is about to occur, prompting execution of the response plan (Correct answer)
- Determine the probability of a risk materializing
- Identify which project phase a risk belongs to
Correct answer: Signal that a risk is about to occur, prompting execution of the response plan
Risk triggers are indicators that warn the team a risk event is imminent, enabling timely activation of the pre-planned response.
Question 7: Under PMBOK guidance, contingency reserves are BEST described as budget set aside to address:
- Unknown-unknown risks not yet identified
- Known risks that have been identified and analyzed (Correct answer)
- Cost overruns caused by poor scope management
- Vendor price increases on fixed-price contracts
Correct answer: Known risks that have been identified and analyzed
Contingency reserves are specifically allocated for known risks identified in the risk register, while management reserves cover unknown risks.
Financial Management for Project Managers Risk Management 4
A project's cost estimate has a P80 value of $2.4M and a P50 value of $2.1M.
A risk-averse sponsor prefers to fund the project at which level?