Project Risk Management



Project Risk Management

Answer Key

1 .b. $44,000

EMV Toyota = ($50,000 X 90%) + (-$10,000 x 10%: = $45,000 + (-$1,000) = $44,000

PMI 1996, 119

2. a. Clear visibility of the information needed for decision making

The risk management approach must ensure that the risks are identified, qualified, quantified, documented, and analyzed. Visibility must be maintained throughout all phases of the project so that the status of the risks taken can be monitored and significant risk developments reported

Carter et al. 1994, 47

3. a. 10 minutes

SO = (b – a)/ 6 = (105 min. - 45 min.)/6 = 60/6 = 10 min

PMI 1996, 16

4. b. Each project is unique in some measure

Uniqueness means that the past is an imperfect guide to the future.

Frame 1994, 75

5. d. PERT

PERT measures standard deviation of activities, particularly those on the critical path. Standard deviation and variance measure risk.

Defense Systems Management College 1989,5-29

6. e. Risk data assembled for the management of the project

Relevant risk data may be stored in a database in a format that will allow the risks to be assessed or brought to the attention of the project team. This database can also aid in prioritizing and reporting risks.

Carter et al. 1994, 134

7. c. Determine probability assessments relating to future events

The Delphi method arrives at a consensus using a panel of experts to determine a solution to a specific problem. Each panelist answers a questionnaire. Then the responses, along with opinions and justifications, are evaluated, and statistical feedback is given to each panel member. The process continues until group responses converge toward a solution.

Wideman 1992, C-2 and C-3

8. d. Monte Carlo techniques

Monte Carlo techniques support various statistical distributions (normal, triangular, beta, uniform, and so on) used in estimating budgets, schedules, and resource allocations.

Frame 1994, 90

9. b. 13%

Probability (starting activity 4 on day 6) = (0.5)3 = 0.1 25 or 13%

PMI 1996, 118

10. c. Critical path analysis

Bringing a project in on time relates to schedule risk, not technical risk.

Defense Systems Management College 1989, 1-2

11. e. All the above

Project managers use range estimating to determine the maximum tolerable variation in an estimate's total cost. They identify the elements in the estimate that could vary from the target estimate such that the total cost of the project would change by an amount greater than the critical variance. At any given level of probability, the variations in these actual values will be either favorable or unfavorable and will range from highest to lowest.

Wideman 1992, V-2 and V-3

12. c. Accepts the consequences of the risk event should it occur

Accepting the consequences of the risk event is categorized as risk acceptance. With this response development approach, the project team takes no action to reduce the probability of the risk's occurring.

Carter et al. 1994, 113 and 114

13. d. 56%

The likelihood is determined by multiplying the probability of event 1 by the probability of event 2.

Wideman 1992, IV-7

14. a. Identifies all the work that must be done and, therefore, helps to identify potential sources of risk

Because the WBS identifies all the work that must be done, it is a good tool for determining potential sources of risks. However, not every risk on a project is found by examining the WBS alone.

PMI 1996, 111

15. b. Should be applied throughout the project and at all levels of system decomposition and project organization

Because risks can be both internal and external, they can occur throughout the life of the project. The risk management process comprises four subprocesses: risk identification, risk quantification, risk response development, and risk response control.

Forsberg, Mooz, and Cotterman 1996, 185

16. b. Sensitivity analysis

Sensitivity analysis places a value on the impact to the project plan of changing a single project variable. Uncertainty and risk are reflected by defining a likely range of variation for each element of the baseline estimate. Such an analysis is done only for those variables that greatly affect cost, time, or economic return and to which the project will be the most sensitive. The effect of changing each of these variables is then assessed across the assumed ranges.

Wideman 1992, C-1 and C-2

17. d. $900,000

EMV = $2M x (60%) + (-$1.5M)(20%) = $1.2M -$3M = $900,000

Frame 1994,82 and 83

18. c. Avoidance, mitigation, and acceptance

In risk response development, responses to threats fall into one of these three categories. Avoidance means eliminating a specific threat usually by eliminating the cause; mitigation means reducing the expected monetary value of a risk event by reducing the probability of occurrence; and acceptance means accepting the consequences.

PMI 1996, 119

19. e. Statistical techniques are considered too theoretical when applied to risk

Although many difficulties are associated with using statistical approaches to quantify risk, the issue of statistical theory is not one of them.

Carter et al. 1994, 33

20. c. Utility theory

Utility theory attempts to formalize management's attitude toward risk. For example, it may be reasonable to assume that a potential loss of 90% will not be viewed with the same equanimity as a loss of 10%. Somewhere between these percentages, the perception will change. At which point will depend on the attitude of the decision maker. In practical project work, utility theory tends to be viewed as theoretical.

Wideman 1992, C-4

21. b. Product of the probability and impact of the risk

The exposure value provides a convenient way to compare risks because comparing impacts or probabilities alone is meaningless.

Carter et al. 1994, 54

22. c. Forces consideration of the probability of each outcome

A graphical way to bring together information, decision-tree analysis quantifies the likelihood of failure and places a value on each decision. Usually applied to cost and time considerations, this form of risk analysis may be linked to a sensitivity analysis.

Wideman 1992, C-3 and C-4

23. a. Defining the steps to be taken if an identified risk event should occur

Contingency plans are part of the risk management plan but may be integrated into other parts of the project plan and are not necessarily separate documents.

PM11996, 120

24. c. The sum total of the most likely probability and impact of the various risk items

After appropriate allowances have been determined, allocations should be made to the major functional areas of responsibility. With the other approaches, the funds are often depleted before the end of the project because of the temptation for others to use the reserve fund for purposes other than risk management.

Wideman 1992, VII-4 and VII-S

25. e. Reducing the expected monetary value of a risk event by reducing the probability of occurrence

An example of mitigation is using proven technology to lessen the probability that the product of the project will not work or reducing the risk event value through buying insurance, or both.

PMI 1996, 119

26. b. During the concept phase

Risks are highest at the beginning of a project because the project faces an uncertain future, and impacts are lowest then because investments in human and material resources are small.

Frame 1994, 84

27. d. Contract type

External risks are those events over which the project manager has no control or influence.

PMI 1996, 11

28. d. Implementation and closeout

Opportunity and risk generally remain high during the concept and planning phases. However, the amount at stake remains low because of the relatively low level of investment up to that point. During project implementation and closeout, however, risk falls to lower levels as remaining unknowns are translated into knowns. At the same time, the amount at stake rises steadily as the necessary resources are invested to complete the project.

Wideman 1992,11-5 and 11-6

29. a. Risk identification, risk quantification, risk response development, and risk response control

The goal of project risk management is to maximize the results of positive events and minimize the consequences of adverse events. These four processes provide the means to achieve that goal.

PMI 1996, 111

30. d. Quality risk

A customer remembers the quality of the project's results long after cost and schedule performance have been forgotten. Thus, project quality management can have the greatest effect on the success of the project. The effects of quality risk are not forgiven if the project fails to deliver its long-term objectives.

Wideman 1992, IV-9

31. b. 70 weeks

E(t) = (Optimistic + 4 * Most Likely + Pessimistic) / 6

= (40 + 200 + 180) / 6

= 420 / 6

= 70 weeks

PMI 1996, 16

32. a. The party who has the most knowledge of certain risks and is in the best position to minimize those risks should bear most, if not all, of those risks.

The party who has the most knowledge about a risk and its consequences, presumably, would have the most knowledge about ways to respond to that risk. Thus, fairness requires that the party with the most knowledge about a risk be responsible for it.

Allen and Davis 1992, 34

33. b. Developing response strategies for all identified risks

Risk is an intrinsic part of project work. Risk management entails identification of project risks, development of strategies to reduce risks significantly or avoid them altogether, and control of the residual risks that remain. Response strategies should be developed only for the most critical risks identified.

Wideman 1992, 1-2

34. a. Causes

Risk can be managed effectively by influencing its causes. Knowing the other items listed is useful when analyzing the importance of managing a risk.

Carter et al. 1994, 16 and 17

35. e. All the above

Risk symptoms are sometimes called triggers. They are an indirect manifestation of an actual risk event and an output of the risk identification process. They indicate the need for risk management activity to mitigate the possibility of a risk's occurring.

PM11996, 114

36. e. All the above

Risk is not a separate function; it is an integral part of project management, and all the objectives listed are a concern of the project manager.

Carter et al. 1994, 132

37. c. Project team knowledge

Project team knowledge may be useful. However, recollections are less reliable than other documented results because people tend to remember the positive aspects of an experience rather than the negative.

PMI 1996, 113

38. d. Has the potential for both gain and loss

Business risks are those events from which an organization can gain, or lose, depending on whether the risk occurs or on the extent to which the impact is reduced. A company can gain or lose such things as revenue, profits, market share, image, or reputation.

Charette 1989, 50

39. a. Project sponsor

The key word in this question is "ultimate." The project sponsor is defined in the PMBOK as the "individual or group within the performing organization who provides the financial resources, in cash or in kind, for the project." Even though a project manager is responsible for the operational execution of the risk management process, the sponsor ultimately pays to have the project completed. Accordingly, the responsibility for all aspects of the project, including risk management, ultimately rests with the sponsor.

Wideman 1992, III-1

40. d. Determine which risk events warrant responses

By comparing the expected monetary values of the identified risks, a project manager can readily see which risks require response development.

PMI 1996, 115

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