Risk Mitigation Strategies & Decision-Making Flashcards

A utility company uses scenario analysis to evaluate outcomes under a 'severe drought' scenario. The PRIMARY distinction between scenario analysis and sensitivity analysis is:

Answer: Scenario analysis evaluates coherent combinations of variables; sensitivity analysis isolates individual variables

Scenario analysis constructs internally consistent narratives where multiple variables shift together, whereas sensitivity analysis isolates the impact of changing one variable while holding others constant.

A risk manager must choose between two loss-control options: Option A reduces frequency by 40%; Option B reduces severity by 40%. With many high-frequency, low-severity events, which option generally provides more value?

Answer: Option A, because reducing many small events lowers total expected loss more efficiently

When losses are high-frequency and low-severity, reducing frequency cuts the large number of events and typically lowers aggregate expected loss more than reducing individual event size.

In a risk matrix, a threat assessed as 'high likelihood, low impact' should PRIMARILY be addressed with:

Answer: Risk reduction controls, to lower the frequency of occurrence

High-frequency, low-impact risks are prime candidates for reduction controls that address root causes, lowering the rate of occurrence to an acceptable level.

When applying the precautionary principle in risk decision-making, an organization should:

Answer: Take preventive action even when full causal evidence is lacking, if consequences could be severe

The precautionary principle mandates protective action under uncertainty when potential harm is serious or irreversible, even without conclusive scientific proof.

A chief risk officer presents a risk report to the board showing that 80% of the firm's VaR comes from 3 of 50 risk factors. This finding BEST supports a decision to:

Answer: Concentrate mitigation resources on the dominant 3 risk factors

Pareto analysis reveals that a small number of risk factors drive most exposure, directing limited mitigation resources to where they will have the greatest impact.

A company enters a joint venture specifically to share the capital cost and risk of entering a new market. This is an example of:

Answer: Risk sharing

Risk sharing distributes exposure among multiple parties, as in a joint venture where each partner bears a proportional share of the potential loss and gain.

The 'bow-tie' model in risk management visually connects:

Answer: Threats and prevention controls on the left with consequences and recovery controls on the right

The bow-tie diagram places the hazard event in the center, with threat causes and prevention barriers on the left side and consequence outcomes with recovery controls on the right.