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Quantitative Risk Analysis

5 minutes 5 Questions

Quantitative Risk Analysis is a way of numerically analyzing the effect of identified risks on overall project objectives using techniques like Monte Carlo simulation and Decision Tree Analysis. It assesses the probable impact on project schedule and cost objectives, providing statistical data like probabilities of reaching objectives and probable project completion dates and costs. It informs about quantifiable likely outcomes of risks and decision-making under uncertainty. However, it requires high quality data and computation, and may not be justified for low complexity projects or those with less at stake.

Guide to Quantitative Risk Analysis

What is Quantitative Risk Analysis?
Quantitative Risk Analysis is a technique that uses numerical values to evaluate risk in a project. It uses statistical methods to quantify the impacts of identified risks on overall project objectives. It's a critical part of Project Risk Management.

Importance of Quantitative Risk Analysis
Quantitative Risk Analysis helps project managers understand the likelihood of achieving project objectives on time and within budget, allowing for potential risks. It allows for better decision-making by predicting the chances of project success and identifying areas of high risk.

How it works
Quantitative Risk Analysis uses identified risks, their probability of occurring, and their impacts on project objectives to provide a numerical assessment of the overall project risk. Techniques used include Monte Carlo simulation, sensitivity analysis, and decision tree analysis.

Exam Tips: Answering Questions on Quantitative Risk Analysis
1. Understand the principles: Make sure you understand the fundamental concepts of Quantitative Risk Analysis, such as risk modeling and simulation.
2. Practice scenarios: Quantitative Risk Analysis often involves hypothetical situations. Be prepared to solve practices questions with different scenarios.
3. Learn formulas: There may be questions that require you to apply certain mathematical formulas. Familiarize yourself with these.
4. Understand the use of software tools: Some questions may refer to the use of specific software tools for Quantitative Risk Analysis like @Risk or Crystal Ball. Understand how these tools work.

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CAPM - Project Risk Management Example Questions

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Question 1

You are a project manager of a high-rise building construction project. There are risks related to design error that could potentially increase the cost by $400,000, with a probability of 0.1. Determine the expected monetary value of this risk.

Correct Answer: $40,000

The expected monetary value of a risk in project management is calculated by multiplying the potential cost of the risk by the probability of it happening. In this case, the cost of the risk is $400,000 and the probability is 0.1. Therefore, the expected monetary value of this risk is $400,000 * 0.1 which equals $40,000. Hence, the correct answer is $40,000. Other answers are incorrect because they do not result from the correct multiplication of the given cost by the probability. For example, $400,000 is the cost of the risk but not the expected monetary value; $100,000 and $4,000 do not align with the multiplication of the risk cost and its probability.

Question 2

A security company is conducting risk analysis on three separate systems. System A has an impact value of $25,000 and a likelihood of 0.4. System B has an impact value of $20,000 and a likelihood of 0.6. System C has an impact value of $30,000 and a likelihood of 0.2. Which system has the highest expected monetary value?

Correct Answer: System B

To find the expected monetary value (EMV), we multiply the impact value by the likelihood for each system: EMV_A = $25,000 * 0.4 = $10,000, EMV_B = $20,000 * 0.6 = $12,000, EMV_C = $30,000 * 0.2 = $6,000. Therefore, System B has the highest EMV.

Question 3

A project is governed by three major risks. Risk A could potentially delay the project by 10 days (with a 0.2 probability), Risk B could potentially delay by 15 days (with a 0.3 probability), and Risk C could potentially delay by 20 days (with a 0.1 probability). What is the total expected delay for the project due to these risks?

Correct Answer: 8.5 Days

The total expected delay for the project can be calculated as the product of each risk's potential delay time and its corresponding probability. For risk A, it is 10 days times 0.2 (2 days). For risk B, it's 15 days times 0.3 (4.5 days). Lastly, for risk C it is 20 days times 0.1 (2 days). When we add up these expected delays we get a total estimate of 8.5 days. The answers '45 Days', '22.5 Days' and '33 Days' are wrong because they weren't achieved using this method of calculating the expected value or were based on incorrect calculations.

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