Project Risk Management Quantitative Risk Analysis 3 — Questions and Answers
Question 1: A project manager wants to determine how much contingency reserve to add to the schedule. Which quantitative technique directly supports this decision?
- Monte Carlo simulation (Correct answer)
- Qualitative risk scoring matrix
- SWOT analysis
- Risk categorization
Correct answer: Monte Carlo simulation
Monte Carlo simulation models schedule uncertainty across thousands of iterations, producing a probability distribution from which reserve levels can be derived.
Question 2: In a decision tree analysis, a chance node shows two outcomes: 60% chance of saving $30,000 and 40% chance of losing $20,000. What is the EMV of this node?
- $10,000 (Correct answer)
- $18,000
- $8,000
- $50,000
Correct answer: $10,000
EMV = (0.60 × $30,000) + (0.40 × −$20,000) = $18,000 − $8,000 = $10,000.
Question 3: Which of the following best describes the purpose of using a beta (PERT) distribution versus a triangular distribution in Monte Carlo simulation?
- Beta/PERT weights the most likely value more heavily, producing a less extreme distribution (Correct answer)
- Beta/PERT requires fewer data points than triangular
- Triangular distribution accounts for correlation between risks
- Beta/PERT is used only for cost estimates, not schedule
Correct answer: Beta/PERT weights the most likely value more heavily, producing a less extreme distribution
The PERT beta distribution gives four times the weight to the most likely estimate, resulting in a smoother, less extreme distribution than the triangular.
Question 4: A project's cost estimate has a standard deviation of $15,000 and a mean of $200,000. Assuming a normal distribution, what is the approximate range covering 68% of outcomes?
- $185,000 to $215,000 (Correct answer)
- $170,000 to $230,000
- $155,000 to $245,000
- $195,000 to $205,000
Correct answer: $185,000 to $215,000
One standard deviation above and below the mean (±$15,000) covers approximately 68% of a normal distribution: $200K ± $15K.
Question 5: During quantitative risk analysis, the project team discovers two risks are positively correlated. What implication does this have for the simulation?
- When one risk is worse than expected, the other tends to be too, increasing overall variability (Correct answer)
- Correlated risks cancel each other out, reducing total project risk
- Positive correlation has no effect on Monte Carlo simulation results
- Correlated risks should be treated as a single combined risk event
Correct answer: When one risk is worse than expected, the other tends to be too, increasing overall variability
Positive correlation means risks move together, amplifying extremes and increasing the spread (variance) of the simulation's output distribution.
Question 6: What does the 'S-curve' output from a Monte Carlo simulation represent?
- The cumulative probability of achieving outcomes up to a given cost or date (Correct answer)
- The rate of risk occurrence over the project lifecycle
- The relationship between schedule and cost risk
- The ranked order of risks by impact
Correct answer: The cumulative probability of achieving outcomes up to a given cost or date
An S-curve plots cumulative probability (0–100%) against cost or schedule values, allowing the team to read off any desired confidence level.
Question 7: A project manager is selecting between two vendors using a decision tree. Vendor A has an EMV of $45,000 and Vendor B has an EMV of $38,000. Which vendor should be selected based solely on EMV?
- Vendor A, because it has the higher EMV (Correct answer)
- Vendor B, because lower EMV indicates lower risk
- Neither; EMV alone is insufficient for vendor selection
- Vendor B, because it has the lower cost
Correct answer: Vendor A, because it has the higher EMV
When comparing mutually exclusive options using EMV, the option with the higher EMV is preferred as it represents greater expected value.
Project Risk Management Quantitative Risk Analysis 3
A project manager wants to determine how much contingency reserve to add to the schedule.
Which quantitative technique directly supports this decision?