Homework 2 Solutions

TECH 638 Risk Management

Chapter 2A: From reference sources

1. Sample solution. Answers will vary.
Machine setup
Wrong
temperature

Material
Cheap
beans

Poor quality
creamer

Wrong coffee
strength setting
Beans not
ground enough

Poor cup of coffee

Genetic defect

Improperly
roasted beans
Labor

Method

2. You are part of the team thats organizing a Blue Man Group Christmas show in
Chicago this year. What are the risks involved in organizing this concert event? List
them by developing a RBS for this show with at least 3 levels - level 0, 1 and 2. Level 1
should have at least 4 categories and each category should have at least 3 subcategories.
Sample solution. Answers will vary.
RBS Level 0
Blue Man Group Christmas
show risk

RBS Level 1
Management risk

External risk

Venue risk

Performance risk

RBS Level 2
Publicity risks
Marketing risks
Contract negotiation risks
Staff training risks
Weather risks
Traffic risks
Vendors risks
Parking risks
Security risks
Refreshment risks
Equipment risks
Performer risks
Planning and coordination risks

Chapter 3: Page 44 in your text book

3. Ave. Frequency = 200 claims/1,000 workers = 0.2 claims per worker
4. No. of claims 0
Probability
0.85

1
0.1

2
0.05

5. Ave. Severity = total losses paid/no. of claims = $300,000/200 claims = $1,500/claim

6. Midpoint of claims range
Probability

1,000
0.9

6,000
0.1

7.
Row

Loss 1

Loss 2

Total loss

A
B
C
D
E
F
G

1,000
6,000
1,000
1,000
6,000
6,000

1,000
6,000
1,000
6,000

0
1,000
6,000
2,000
7,000
7,000
12,000

Probability
0.8500
0.0900
0.0100
0.0405
0.0045
0.0045
0.0005
1.0000

Total loss *
probability
0.0
90.0
60.0
81.0
31.5
31.5
6.0
300.0

Joint
probabilities
0.1*0.9
0.1*0.1
0.05*0.9*0.9
0.05*0.9*0.1
0.05*0.1*0.9
0.05*0.1*0.1