Topic 4: Risk Analysis Flashcards
What are the two types of risk analysis and pros and cons of each?
qualitative:
pros: quick determination of threat level using anticipated likelihood and consequences
cons: subjective
quantitative:
pros: assigning specific values (probability and $) using past info and observations
What is the purpose of risk modeling and how is it used?
determing objective measures of risk; uses probability analysis for future events based on past events
What assumptions must be true for theoretical probability to be valid?
collectively exhaustive: all possible outcomes known
outcomes mutually exclusive
all outcomes equally likely to occur
What is the Law of Large Numbers?
a large amount of past info / data must be used to obtain the most accurate estimate about future events
What must be true for probability distributions to be valid?
collectively exhaustive
mutually exclusive
outcomes do NOT need to be equally likely
What is the use of a decision tree?
analyzes decisions made by the firm and the outcomes of each decision; used to create the probability distribution table
What is included in a probability distribution table?
strategic outcome
its probability
its consequence
its expected value
What are the main measures of volatility we use?
variance, standard deviation, coefficient of variation (and expected value)
How do we calculate expected value?
EV = probability * severity
How do we calculate the standard deviation?
square root of variance
How do we calculate the COV?
COV = SD / EV
How many outcomes are within these SDs of the EV?
1 SD
2 SD
3 SD
68% within 1 SD
95% within 2 SD
99% within 3 SD
