Name: Reg. No.

INDIAN INSTITUTE OF MANAGEMENT CALCUTTA

Risk Management
Quiz
Duration 1 Hour Total Marks 30
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Instructions:

1. Write your name and registration number clearly in the space provided at the top of this
paper, failure to do so will lead to a penalty of 3 Marks.
2. This is a closed book examination.
3. Please ensure that you question paper consists of 6 printed pages numbered 1 through 6.
4. For Question No. 1, clearly state whether the statement is true or false in the space
provided after the statement. For Question No. 2 to 8, write the correct option in the box
provided after the question.
5. Clearly write your answer or choice in the space provided only. Answers written elsewhere
will not be evaluated. In case you want to change your answer, please cross the previous
one and clearly write the final answer. Illegible answers will not be evaluated.
6. Only answers entered in the space provided will be used for evaluation, therefore you need
not show your working. No marks will be awarded if the answer entered in the space
provided is incorrect.
7. Use of calculators is allowed while the use of computers is not allowed in this part.
8. You may use the blank space in the paper for rough work.
9. Please enter the final answer in ink only, answer entered using pencil will not be evaluated.
No queries will be entertained during the examination except those concerning legibility.

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1. State in the space provided after each statement whether the statement is TRUE or FALSE.
(10 x 1 Marks)

a. The maximax decision criterion is used by pessimistic decision makers and

maximizes the maximum outcome for every alternative.

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b. Any problem that can be presented in a decision tree can also be tabulated in a
decision table.

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c. The decision maker can control the states of nature.

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d. Sensitivity Analysis considers how sensitive a decision maker is towards risk.

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e. In decision-making under uncertainty, minimax regret decision criteria best protects

the decision maker from undesirable results.

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f. In a decision tree, the expected payoff at a decision node is obtained by adding the
products obtained by multiplying the payoff associated with each branch with the
probability associated with that branch.

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g. In any decision tree exactly two branches emanate from each state of nature node.

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h. Expected value of sample information is the difference between expected payoff

with sample information assuming that the sample information is available free of
cost and the maximum expected monetary value without the sample information.

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 i. Bayes’ theorem is used for assigning payoff values to the different branches of the
decision tree.

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j. Expected Value of Sample Information (EVSI) can never be greater than the
Expected Value of Perfect Information (EVPI).

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2. A rational decision maker must choose between two alternatives. Alternative 1 has a higher
EMV than Alternative 2, but the decision maker chooses Alternative 2. What might explain
why this occurs? (1 Mark)
a. Alternative 2 may have a higher expected utility.
b. Alternative 1 may have a lower expected opportunity loss.
c. The probabilities are not known.
d. A rational decision maker could not possibly choose alternative 2.

Answer:

3. Which of the following is true about the expected value of perfect information? (1 Mark)
a. It is the amount you would pay for any sample study.
b. It is calculated as EMV minus EOL.
c. It is calculated as expected value with perfect information minus maximum EMV.
d. It is the amount charged for marketing research.

Answer:

4. The ABC Co. is considering a new consumer product. They believe that the XYZ Co. may
come out with a competing product. If ABC adds an assembly line for the product and
XYZ does not follow with a competitive product, their expected profit is Rs.40,000; if they
add an assembly line and XYZ does follow, they still expect a Rs.10,000 profit. If ABC adds
a new plant addition and XYZ does not produce a competitive product, they expect a profit
of Rs. 600,000; if XYZ does compete for this market, ABC expects a loss of Rs. 100,000. For
what value of probability that XYZ will offer a competing product will ABC be indifferent
between the alternatives? (3 Marks)
a. 0.467
b. 0.652
c. 0.714
d. 0.836

Answer:

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5. If p is the probability of Event 1 and (1 – p) is the probability of Event 2, for what values of
p would you choose A? B? C? Values in the table are payoffs. (3 Marks)

Choice/Event Event 1 Event 2

A 0 20

B 4 16

C 8 0

a. Choose B if p ≤ 0.4, choose A if 0.4 ≤ p ≤ 0.7, and choose C if p ≥ 0.7.

b. Choose C if p ≤ 0.5, choose A if 0.5 ≤ p ≤ 0.8, and choose B if p ≥ 0.8.
c. Choose A if p ≤ 0.5, choose B if 0.5 ≤ p ≤ 0.8, and choose C if p ≥ 0.8.
d. Choose B if p ≤ 0.5, choose A if 0.5 ≤ p ≤ 0.8, and choose C if p ≥ 0.8.

Answer:

6. Manoj is considering opening a bookstore near the IIMC campus, and he has begun an
analysis of the situation. There are two possible sites under consideration. One is relatively
small, while the other is large. If he opens at Site 1 and demand is good, he will generate a
profit of Rs. 50,000. If demand is low, he will lose Rs. 10,000. If he opens at Site 2 and
demand is high he will generate a profit of Rs. 80,000, but he will lose Rs. 30,000 if demand
is low. He also has decided that he will open at one of these sites. He believes that there is a
50 percent chance that demand will be high. Manoj is a rational person and would like to
maximize his expected utility. Given a situation where Manoj can gain Rs. 80,000 with
probability 0.22 and lose Rs. 30,000 otherwise, Manoj is indifferent between this situation
and a sure loss of Rs. 10,000.

For what value of utility for Rs. 50,000, U(50000), will Manoj be indifferent between the two
sites considered for opening the bookstore? (2 Marks)

a. 0.75
b. 0.64
c. 0.78
d. 0.68

Answer:

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7. In a particular decision making situation, there are two states of nature, namely, favourable
market and unfavourable market. The decision maker believes that there is a 70% chance
that the market will be favourable, and a 30% chance that the market will be unfavourable. A
market survey can be performed to get a more accurate estimate of this probability. From
historical data it is known that whenever the market was actually favourable, the market
survey predicted it correctly 80% of the times, also whenever the market was actually
unfavourable, the study predicted it correctly 80% of the times.

What are the probabilities that market will actually be favourable given the market survey
predicts a favourable market and the market will actually be unfavourable given the market
survey predicts an unfavourable market? (2 Marks)
a. 0.80 and 0.80 respectively
b. 0.70 and 0.30 respectively
c. 0.62 and 0.38 respectively
d. 0.90 and 0.63 respectively

Answer:

8. XYZ manufactures memory chips in lots of ten chips. From past experience, XYZ knows
that 80% of all lots contain 10% (1 out of 10) defective chips, and 20% of all lots contain
60% (6 out of 10) defective chips. If a good batch (10% defective) of chips is sent on to the
next stage of production, processing costs of Rs. 10000 are incurred, and if a bad batch (60%
defective) is sent on to the next stage of production, processing costs of Rs. 40000 are
incurred. XYZ can also rework any batch at a cost of Rs. 10000 before sending it to the next
stage of production. A reworked batch is sure to be a good batch.
Based on the information given above, choose the correct option for each of the following
questions.
a. Given a lot, what is expected cost of sending it on to the next stage of production
without reworking? (2 Marks)
i. Rs. 20000
ii. Rs. 16000
iii. Rs. 10000
iv. Rs. 25000

Answer:

b. If XYZ were to minimize its total expected cost, it should (1 Mark)

i. rework each batch before sending it on to the next stage of production.
ii. send each batch on to the next stage of production directly.

Answer:

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In addition to the information given above, consider the following information to answer
Parts (c) and (d). XYZ also has an option of testing one chip from each batch in an attempt
to estimate whether the batch is defective. The cost of this testing is Rs. 1000.

c. What is the probability that the batch is good (10% defective) given the tested chip is
not defective? (2 Marks)
i. 0.60
ii. 0.90
iii. 0.80
iv. 0.20

Answer:

d. What is the maximum that XYZ should be willing to pay for this testing, i.e. what is
the Expected Value of Sample Information? (3 Marks)
i. Rs. 1000
ii. Rs. 0
iii. Rs. 1600
iv. Rs. 400

Answer: