risk

1. Refer to the article in Topic 5 “Superstorm Alters Companies’ Risk Focus”.

a. Indicate one example of a risk control option illustrated in this article.

One example would be resilience planning.

b. For your answer to part [a], indicate what specific risk control option is being illustrated by the example. In other words, is your answer an example of avoidance, loss prevention, etc.?

Resilience planning is an example of loss reduction.

c. For your answer to part [b], explain why your answer is an example of risk control. In other words, explain how it fits into the goals of risk control options as discussed in class.

The article talks about how companies need to have resilient plans prepared for natural disasters. That companies need to rethink strategies to stay operative after a disasters, and that companies whom has a resilient plan often wind up being the most successful companies.

2. Refer to the Case Studies article in Topic 5 “Safety Worry Leads to End of a Popular Toy Magnet”.

a. Indicate an example of a risk control option implemented by the maker of Buckyballs in this article.

The risk control option implemented in this article is stop engaging in an activity causing a loss in which they stopped the production of the magnetic toys, and stopped selling them.

b. For your answer to part [a], indicate what specific risk control option is being illustrated by the example. In other words, is your answer an example of avoidance, loss prevention, etc.?

The risk control option is avoidance.

c. For your answer to part [b], explain why your answer is an example of risk control. In other words, explain how it fits into the goals of risk control options if the specific risk control option is properly implemented as discussed in class capture.

The maker of buckyball stopped manufacturing and stopped selling them, because children were swallowing them, which might cause loses for the company. The company stopped engaging in an activity that would cause a loss.

3. Consider the following two scenarios [Option A and Option B]:

Manaka Inc. has the total inventory of $6,000. Currently, Manaka has this entire inventory stored in one warehouse. There is a 10% chance that a fire could occur. If this fire occurs, then Manaka will lose their entire inventory. [Option A]

As an alternative to keeping their entire inventory in one warehouse, Manaka is considering separating their inventory evenly into two different warehouses. Once again, there is a 10% chance that a fire could occur in each warehouse. If this fire occurs, then Manaka would once again lose their entire inventory in that particular warehouse. [Option B]

Read about this concept in Chapter 5 of your text under the heading ‘Separation’ on pages 5.9 – 5.12 in order to answer this question properly.

a. First, consider Option A.
What is the probability of having zero dollars in losses? What is the probability of having $6,000 in losses? 
Derive the probability distribution for total dollar losses under Option A. Note that this question asks for total dollar losses, not number of losses. Hint: Think about the definition of a probability distribution and apply it in this case.

b. Now consider Option B. 
Derive the probability distribution for total losses under Option B. Hint: In the case of Option B, you need to consider all the possible outcomes in terms of dollar amount of losses, recognizing that Manaka now has two warehouses. Further hint: consider the rules of probability as discussed in class when you derive your probability distribution.

90%*90% = 81%

90%*10% = 9%

10%*10% =1%

c. Compare the amount of risk Manaka faces under Option A vs. Option B. Which option has more risk? Justify and demonstrate your answer. Recall our discussion in Topic 4 about how we measure risk.

Option A

Mean= (0)*(.9)+(6000)*(.1) =600

Variance = 324000+2916000=3240000

Standard deviation=(3240000)^(1/2)=1800

Option B

Mean =(0)(.81)+(3000)(.09)+(3000)(.09)+(6000)(.01)= 600

Variance = 291600+518400+518400+291600=1620000

Standard deviation=(1620000)^(1/2)=1272.79

Option A has a higher standard deviation, which means option A has more risk.