Risk Management & Assessment Flashcards

If an asset is worth $200,000 and an incident would destroy 25% of its value, what is the single loss expectancy (SLE)?

Answer: $50,000

SLE = asset value × exposure factor = $200,000 × 0.25 = $50,000.

If the SLE is $50,000 and the event is expected twice per year, what is the annualized loss expectancy (ALE)?

Answer: $100,000

ALE = SLE × annualized rate of occurrence = $50,000 × 2 = $100,000.

A control costs $30,000 per year and reduces ALE from $100,000 to $60,000. Is it cost-effective?

Answer: Yes, because it saves $40,000 annually at a $30,000 cost

The control's benefit ($40,000 reduction) exceeds its annual cost ($30,000), yielding a net gain of $10,000.

Monte Carlo simulation is used in quantitative risk analysis to:

Answer: Model a range of possible outcomes by running many random iterations

Monte Carlo simulation runs thousands of iterations with random inputs to produce a probability distribution of outcomes.

Expected monetary value (EMV) of a risk is calculated as:

Answer: Probability × impact

EMV multiplies the probability of an event by its monetary impact to weigh risks.

A decision tree analysis helps risk managers to:

Answer: Evaluate alternatives by comparing expected values of uncertain outcomes

Decision trees map choices and uncertain outcomes with probabilities to compare expected values.

Sensitivity analysis (such as a tornado diagram) shows:

Answer: Which uncertain variables have the greatest effect on an outcome

Sensitivity analysis ranks variables by how strongly they influence the objective, highlighting the biggest drivers of uncertainty.