Lesson 11 - CAPM Prep Risk V2

CAPM Certification
Lesson 11Project Risk Management
CAPM & PMBOK are registered trademarks of the Project Management Institute, Inc.
Copyright 2014, Simplilearn, All rights reserved.

Objectives
After completing this
lesson, you will be able
to:
Define risk
Identify key terms related to risk
Calculate risk
Identify different categories of risk
Describe Project Risk Management processes
Project Management Process Map
Risk
The definition of Risk is as follows:
Risk is an uncertain event or condition that, if it occurs, has a positive or negative effect on a projects
objectives.[1]
You are currently using a software for managing the teams time sheet. Due to a budget constraint, you
are expected to use a new software. You are apprehensive on using the new software, but on using it, you
realize that the new software is more efficient and has better reporting structure. This is a case of risk
having a positive outcome.
If the Government declares a mandatory holiday to check flu spread, the project timelines may get
hampered and this is an example of risk affecting the project negatively.
Key Terms
Positive risks are known as opportunities and negative risks are known as threats. A risk that can have a positive or
negative risk is called business risk. A risk that can only have a negative consequence is called pure risk. Given below
are other risk related terms:
Understand the key terms of project risk management may be useful while answering the exam.
Exam Tips
5
Calculation of Risk
Risks can be managed only if they are measured quantitatively.
Risk is measured by assigning a monetary value to it.
Risk is calculated by multiplying probability and impact of risk.
Risk Weight = Risk Probability * Risk Impact

where risk probability is the likelihood that a risk event could happen and
risk impact is the effect on the project objectives if a risk event happens.
Calculation of RiskExample
Calculate the expected monetary value for the given work packages.
Work Package
Probability
Impact
25%
-$10,000
40%
-$2,000
10%
+$20,000
Work Package
Probability
Impact
Expected Monetary Value (EMV)
25%
-$10,000
-$2,500
40%
-$2,000
-$800
10%
+$20,000
+$2,000
TOTAL EMV
-$1,300
Risk Categorization
Risks can be classified in various ways. One classification of risk is as follows:
External Risks
Internal Risks
Technical Risks
Project
Management Risks
Arise out of external factors. E.g., regulatory, governmental policies, subcontractors,

suppliers, and environmental
Arise within the project. E.g., funding, resources, and prioritization
Arise out of the technology being used. E.g., requirements, technology, and quality
Arise out of project management activities. E.g., estimating, planning, schedule, and
communication
Risks can also be classified on the basis of their origin; scope risks, resource risks, schedule risks, cost risks, and quality
risks.
8
Decision Tree
A decision tree is used to analyze risk and its impact on decisions, in the face of uncertainties.
If you need to buy a car, which one would you buy? Which option has a risk over a period of 5 years?
Failure : Probability=10%
Impact= $15,000
Initial cost of buying the new car
= $20,000
Pass : Probability=90%
Impact= $000
Decision: Which car would you

buy? A new one or a used one.
Initial cost of buying the old car=
$15,000
Failure : Probability=70%
Impact= $10,000
Pass : Probability=30%
Impact= $000
A
9
Risk = Probability * Impact

Risk associated with the new car is $20,000 + ($15,000 * 10%) + ($000*90%) = $21,500
Risk associated with the old car is $15,000 + ($10,000*70%) + ($000*30%) = $22,000
Risk Reserve
Project cost should include both the known and unknown risks. The various risk reserves are calculated in the order
given below:
Project
Activities
Small,
assigned
project tasks
10
Work
Packages
Lowest level
of WBS
Contingency
Reserve
Cost
Baseline
Management
Reserve
Control
Account
Work packages
clubbed to
manage cost
Set of
control
accounts
Reserve for
known
uncertainties
Project cost
for
budgeting
Reserve for
unknown
uncertainties
Project Risk Management

The definition of Project Risk Management is as follows:
Project risk management includes the processes of conducting risk management planning, identification, analysis,
response planning, and risk monitoring and controlling on a project.[2]
The key objective of risk management is to increase the probability and or impact of positive events and decrease the
probability and or impact of negative events.
11
Business ScenarioProblem Statement
12
Cynthia is a subject matter expert and the Director of New Store Construction in Small Markets.
Because of her expertise and experience in managing complex store build out for the corporation, she
has been appointed as the manager of a new, large, and complex construction project involving a gas
station. None of the previous construction projects included a gas station and convenience store
component. Since this is a new initiative and way for the company to diversify their business, this
project is business critical, very visible to senior management and can be a career maker or breaker.
The senior management team is anxious to see the project brought to life, but the company lacks a
strong risk management process. They would like Cynthia to prepare a risk response plan and submit it
prior to the projects first milestone in 3 weeks. What should Cynthia do?
Business ScenarioSolution
13
Because the company lacks a risk management structure and has handled risk poorly in the past,
Cynthia should first search internally for risk experts. Internal experts would be knowledgeable of risks
that exist within the business as it deals with construction. Then she should identify subject matter
experts external to the organization knowledgeable of risk management as it relates to convenience
stores with a gas station component. Another viable resource would be the historical documents
around risk from previously completed projects, which will also point out other stakeholders and/or
SMEs who can contribute to the risk response planning process. After having the key players in place,
Cynthia can work with them to go through the identification and prioritization process of risk that
leads up to the development of their plan.
Project Risk Management Processes

Given below are the Project Risk Management processes:
14
Plan Risk Management

Plan Risk Management is the process of defining how to conduct risk management activities for a project. The risk
management plan serves as the roadmap for identifying, analyzing, and addressing risks on the project. [3] It is part of
the Planning Process Group.
PROJECT RISK MANAGEMENT

Project management plan
Project charter
Stakeholder register
Plan Risk Management
Enterprise environmental factors

Organizational process assets
Risk management plan
Legend
Input
Output
Tools & Techniques
Planning Process
15
Analytical techniques
Expert judgment
Meetings
Definition of Impact ScaleExample

The table given below shows the impact on scope, cost, time, and quality.
Project
Objective
16
Very Low
0.05
Low
0.1
Moderate
0.2
High
0.4
Very High
0.8
Scope
Barely
noticeable
change
Minor areas
affected
Some important
areas affected
Unacceptable
change in scope
Entire scope
rendered useless
Cost
Insignificant cost
increase
<10% cost increase
10-20% cost
increase
20-40% cost
increase
>40% cost increase
Time
Insignificant
change
<5% change to
schedule
5-10% change to
schedule
10-20% schedule
change
>20% schedule
change
Quality
Barely
noticeable
degradation
Few parameters
affected
Needs sponsor
approval
Major quality
compromise
Need to scrap the

project
Identify Risks
Identify Risks is the process of determining which risks may affect the project and documenting their characteristics. [4]
It belongs to the Planning Process Group.
Project management
plan
Project documents
Activity cost estimates
Scope baseline
Activity duration
estimates
Cost management plan
Stakeholder register
Quality management
plan
Schedule management
plan
Procurement
documents
Human resource
management plan
Organizational process
assets

Risk management plan
Legend
Input
Output
Tools & Techniques
Planning Process
17
Enterprise
environmental factors
Identify Risks
Risk register
Risk register
Documentation
reviews
Diagramming
Expert judgment
techniques
Information gathering
SWOT analysis
techniques
Assumptions analysis
Checklist analysis
Perform Qualitative Risk Analysis

Perform Qualitative Risk Analysis is the process of prioritizing risks for further analysis or action by assessing their
probability of occurrence and impact. [5] This process belongs to the Planning Process Group.
Concept based questions on qualitative risk analysis can be expected in the exam.
Exam Tips
18
Probability and Impact MatrixExample

A probability and impact matrix tabulates the probability and impact scales for the opportunities and threats on the
project.
!
19
Once the probability and impact matrix is filled, a risk threshold can be defined and a risk becomes a
candidate for active management.
Perform Quantitative Risk Analysis

Perform Quantitative Risk Analysis is the process of numerically analyzing the effect of identified risks on overall
project objectives. [6] This is part of the Planning Process Group.
Concept based questions on quantitative risk analysis can be expected in the exam.
Exam Tips
20
Plan Risk Responses

Plan Risk Responses is the process of developing options and actions to enhance opportunities and to reduce threats
to project objectives. [7] It is part of the Planning Process Group.
!
21
Residual risks are those that remain after the risk responses were implemented. Secondary risks arise out
of implementing risk responses.
Control Risks
Control Risks is the process of implementing risk response plans, tracking identified risks, monitoring residual risks,
identifying new risks, and evaluating risk process effectiveness throughout the project. [8] It is part of the Monitoring
and Controlling Process Group.

updates
Risk register
Project documents
updates
Work performance
reports
Work performance data
Work performance
information
Control Risks
Organizational process
assets updates
Change request
Legend
Input
Output
Tools & Techniques
Monitoring & Controlling
22
Risk audits
Risk re-assessment
Meetings
Reserve analysis
Variance and trend

analysis
Technical performance
measurement
Quiz
23
QUIZ
1
Purchasing insurance coverage for your project equipment is an example of which risk response?
a.
Transfer
b. Mitigation
24
c.
Acceptance
d.
Avoidance
QUIZ
1
Purchasing insurance coverage for your project equipment is an example of which risk response?
a.
Transfer
b. Mitigation
c.
Acceptance
d.
Avoidance
Answer: a.
Explanation: It is an example of transfer as the financial risk is transferred to the insurance company.
25
QUIZ
2
What action should a project manager first take when an unidentified risk event occurs?
a.
Inform the customer of the possible consequences
b. Inform the senior management of the possible consequences
26
c.
Redo the risk identification process to get prepared for other known-unknowns
d.
Create a work around
QUIZ
2
What action should a project manager first take when an unidentified risk event occurs?
a.
Inform the customer of the possible consequences
b. Inform the senior management of the possible consequences

c.
Redo the risk identification process to get prepared for other known-unknowns
d.
Create a work around
Answer: d.
Explanation: The right project management practice dictates that a work around should be created as a
response to the event.
27
You are a project manager with a financial firm that has multinational dealings. You feel the financial
meltdown in one of the client countries could affect your project adversely, so you want to hedge your
risks. Although the probability of occurrence of the event is low, you are advised to play it safe. In
terms of risk attitude, your organization could best be described as?
QUIZ
3
a.
Risk Seeker
b. Risk Averse
28
c.
Risk Neutral
d.
Risk Mitigator
You are a project manager with a financial firm that has multinational dealings. You feel the financial
meltdown in one of the client countries could affect your project adversely, so you want to hedge your
risks. Although the probability of occurrence of the event is low, you are advised to play it safe. In
terms of risk attitude, your organization could best be described as?
QUIZ
3
a.
Risk Seeker
b. Risk Averse
c.
Risk Neutral
d.
Risk Mitigator
Answer: b.
Explanation: Someone who doesn't want to take risk is called risk averse and the attitude of the
organization seems to be the same.
29
QUIZ
4
Decision tree analysis can be classified as a ________________.
a.
Quantitative risk analysis and modeling technique
b. Subset of the EMV technique
30
c.
Subset of the Earned Value Management (EVM) technique
d.
Risk response strategy
QUIZ
4
Decision tree analysis can be classified as a ________________.
a.
Quantitative risk analysis and modeling technique
b. Subset of the EMV technique

c.
Subset of the Earned Value Management (EVM) technique
d.
Risk response strategy
Answer: a.
Explanation: Decision tree analysis is a quantitative risk analysis technique that involves a diagram
describing different decisions under consideration and the impact on the project of choosing one over the
another.
31
QUIZ
5
How early can a comprehensive risk analysis be done on a project?
a.
During project initiation
b. After scope decomposition
32
c.
During scope validation
d.
After the project management plan has been baselined
QUIZ
5
How early can a comprehensive risk analysis be done on a project?
a.
During project initiation
b. After scope decomposition

c.
During scope validation
d.
After the project management plan has been baselined
Answer: b.
Explanation: Only after the entire scope has been defined in the work breakdown structure (WBS), a
comprehensive risk analysis can be done.
33
QUIZ
6
A project manager is managing a short duration pilot project and has started the risk management
planning process. He has identified new risks and prioritized them based on the probability and
impact matrix. The project manager now proceeds to plan responses for the risks without analyzing
the risks numerically. According to you, this decision of project manager is:
a.
b.
c.
d.
34
Incorrect, as it is important to numerically analyze each risk so that they can be

responded properly
Correct, as quantitative risk analysis is waste of time and not required if risks
are already assessed qualitatively
Incorrect, as quantitative risk analysis is important. It is important to calculate
EMV for each risk and then later move to risk response planning
Correct, as this is a short duration project and project manager might skip
quantitative risk analysis if he feels it is not assisting in the risk management
process
QUIZ
6
A project manager is managing a short duration pilot project and has started the risk management
planning process. He has identified new risks and prioritized them based on the probability and
impact matrix. The project manager now proceeds to plan responses for the risks without analyzing
the risks numerically. According to you, this decision of project manager is:
a.
b.
c.
d.
Incorrect, as it is important to numerically analyze each risk so that they can be

responded properly
Correct, as quantitative risk analysis is waste of time and not required if risks are
already assessed qualitatively
Incorrect, as quantitative risk analysis is important. It is important to calculate EMV for
each risk and then later move to risk response planning
Correct, as this is a short duration project and project manager might skip
quantitative risk analysis if he feels it is not assisting in the risk management process
Answer: d.
Explanation: The amount of rigor in the analysis is dependent upon the duration and complexity of the
project. For a short duration project, it may not be necessary to perform numeric (quantitative) risk
analysis.
35
Summary
Here is a quick recap of
what was covered in
this lesson:
Risk is an uncertain event or condition that, that has a positive or negative effect on a
projects objectives
Risk is calculated by multiplying probability and impact of risk. (Risk Weighting =
Probability * Impact)
Risk can be classified in various ways. Under one category, risks are classified as external,
internal, technical and project management; and on the basis of origin, risks can be
classified as scope, resource, schedule, cost and quality risks
A decision tree is used to analyze risk and its impact on decisions, in the face of
uncertainties
The six Project Risk Management processes are Plan Risk Management, Identify Risks,
Perform Qualitative Risk Analysis, Perform Quantitative Risk Analysis, Plan Risk
Responses, and Control Risks
36
Thank You
CAPM & PMBOK are registered trademarks of the Project Management Institute, Inc.
37

References
[1] Definition taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body
of Knowledge, (PMBOK Guide) Fifth Edition, Project Management Institute, Inc., 2013.
[2] Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Fifth
Edition, Project Management Institute, Inc., 2013, Page 309.
38

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CAPM Certification

Lesson 11Project Risk Management

Copyright 2014, Simplilearn, All rights reserved.

Identify key terms related to risk

Identify different categories of risk

Describe Project Risk Management processes

Copyright 2014, Simplilearn, All rights reserved.

Project Management Process Map

Copyright 2014, Simplilearn, All rights reserved.

Copyright 2014, Simplilearn, All rights reserved.

Copyright 2014, Simplilearn, All rights reserved.

Risk is measured by assigning a monetary value to it.

Risk is calculated by multiplying probability and impact of risk.

Risk Weight = Risk Probability * Risk Impact

Copyright 2014, Simplilearn, All rights reserved.

Expected Monetary Value (EMV)

Arise out of external factors. E.g., regulatory, governmental policies, subcontractors,

Arise within the project. E.g., funding, resources, and prioritization

Copyright 2014, Simplilearn, All rights reserved.

Decision: Which car would you

Risk = Probability * Impact

Copyright 2014, Simplilearn, All rights reserved.

Project Risk Management

Copyright 2014, Simplilearn, All rights reserved.

Business ScenarioProblem Statement

Copyright 2014, Simplilearn, All rights reserved.

Copyright 2014, Simplilearn, All rights reserved.

Project Risk Management Processes

Copyright 2014, Simplilearn, All rights reserved.

Plan Risk Management

PROJECT RISK MANAGEMENT

Plan Risk Management

Enterprise environmental factors

Copyright 2014, Simplilearn, All rights reserved.

Definition of Impact ScaleExample

<10% cost increase

>40% cost increase

Need to scrap the

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Activity cost estimates

Cost management plan

PROJECT RISK MANAGEMENT

Copyright 2014, Simplilearn, All rights reserved.

Perform Qualitative Risk Analysis

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Probability and Impact MatrixExample

Perform Quantitative Risk Analysis

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Plan Risk Responses

PROJECT RISK MANAGEMENT

Project management plan

Project management plan

Work performance data

Variance and trend

Copyright 2014, Simplilearn, All rights reserved.

Copyright 2014, Simplilearn, All rights reserved.

Copyright 2014, Simplilearn, All rights reserved.

Inform the customer of the possible consequences

b. Inform the senior management of the possible consequences

Create a work around

Copyright 2014, Simplilearn, All rights reserved.

Inform the customer of the possible consequences

b. Inform the senior management of the possible consequences

Create a work around