Statistics Risk Assessment & Management 4 — Questions and Answers
Question 1: Risk appetite differs from risk tolerance in that risk appetite refers to:
- The maximum loss an organization can sustain before insolvency
- The broad amount of risk an entity is willing to pursue to achieve objectives (Correct answer)
- The statistical threshold used in hypothesis testing for risk events
- The minimum acceptable return on a risky investment
Correct answer: The broad amount of risk an entity is willing to pursue to achieve objectives
Risk appetite is the strategic, forward-looking statement of how much risk an organization is willing to accept in pursuit of its goals.
Question 2: In Fault Tree Analysis (FTA), AND gates produce a top-level failure only when:
- At least one input event occurs
- All input events occur simultaneously (Correct answer)
- Exactly one input event occurs
- No input events occur
Correct answer: All input events occur simultaneously
An AND gate in FTA requires all contributing (input) events to occur together before the parent (output) failure event is triggered.
Question 3: Which distribution is most appropriate for modeling the number of claims filed to an insurance company per month?
- Normal distribution
- Uniform distribution
- Poisson distribution (Correct answer)
- Beta distribution
Correct answer: Poisson distribution
The Poisson distribution models count data of rare events occurring at a known average rate over a fixed period, matching insurance claim counts.
Question 4: A project has a 30% chance of a $500K loss and a 70% chance of a $100K gain. What is the expected monetary value (EMV)?
- −$80,000 (Correct answer)
- $−50,000
- $70,000
- $−15,000
Correct answer: −$80,000
EMV = 0.30 × (−$500,000) + 0.70 × ($100,000) = −$150,000 + $70,000 = −$80,000.
Question 5: In the context of risk, 'black swan' events are characterized by:
- High probability and high impact outcomes modeled easily in advance
- Extreme rarity, severe impact, and post-hoc rationalization as predictable (Correct answer)
- Moderate frequency losses that cluster together in time
- Routine operational risks with well-defined probability distributions
Correct answer: Extreme rarity, severe impact, and post-hoc rationalization as predictable
Black swan events (Nassim Taleb) are highly improbable, massively consequential outliers that are retrospectively explained as if they were predictable.
Question 6: When constructing a risk register, which information is LEAST essential to include?
- Risk owner responsible for monitoring
- Likelihood and impact ratings
- The CEO's personal investment portfolio (Correct answer)
- Mitigation and contingency plans
Correct answer: The CEO's personal investment portfolio
A risk register captures risk descriptions, likelihood, impact, ownership, and response plans — executive personal finances are irrelevant to project risk.
Question 7: The Sharpe Ratio assesses risk-adjusted return by dividing excess return by which measure?
- Beta
- Standard deviation of portfolio returns (Correct answer)
- Maximum drawdown
- Skewness
Correct answer: Standard deviation of portfolio returns
Sharpe Ratio = (Portfolio Return − Risk-Free Rate) / Standard Deviation, using total volatility as the risk denominator.
Statistics Risk Assessment & Management 4
Risk appetite differs from risk tolerance in that risk appetite refers to: