ExpertEasy1 markMultiple Choice
CPA · Question 09 · Area 1: Business Analysis
Scenario: A company identifies two risks.<br/>Risk A: Probability 20%, Impact $1,000,000.<br/>Risk B: Probability 5%, Impact $5,000,000.<br/><br/>Which statement accurately compares these risks using Expected Value (EV) analysis?
Scenario: A company identifies two risks.<br/>Risk A: Probability 20%, Impact $1,000,000.<br/>Risk B: Probability 5%, Impact $5,000,000.<br/><br/>Which statement accurately compares these risks using Expected Value (EV) analysis?
Answer options:
A.
Risk A has a higher Expected Value ($200,000) than Risk B ($25,000).
B.
Risk B has a higher Expected Value ($250,000) than Risk A ($200,000).
C.
Both risks have the same Expected Value.
D.
Risk A is more critical solely because it has a higher probability.
How to approach this question
Calculate EV = Probability * Impact for each. Compare.
Full Answer
B.Risk B has a higher Expected Value ($250,000) than Risk A ($200,000).✓ Correct
Risk A: 20% of $1M = $200k. Risk B: 5% of $5M = $250k. Therefore, Risk B has the higher expected financial impact.
Common mistakes
Decimal error on 5% (calculating as 0.5 instead of 0.05) or simple multiplication errors.
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