WMBA 6623 Week 6 Quantitative Risk Analysis Example

Pricing Eleven Risks: An Expected Value of About $413,000 for the Loan Servicing Consolidation, With Every Probability and Cost Sourced and a Three-Point Estimate on the $435,000 Escrow Line

Student Name

Walden University

WMBA 6623: Enterprise and Project Risk Management

Instructor Name

Month Day, Year

Pricing Eleven Risks: An Expected Value of About $413,000 for the Loan Servicing Consolidation, With Every Probability and Cost Sourced and a Three-Point Estimate on the $435,000 Escrow Line

Assumptions and Sources

This analysis puts a dollar figure on the eleven largest threats to the servicing consolidation at Lakeshore Community Bank (composite). Probabilities are the chance the event occurs before the project closes, with planned responses in place. They come from the project's calibrated scoring session, converted from scale ranges to single figures, and from the bank's 2019 conversion records where those apply. Costs are what the event would cost the bank if it occurred.

Four sources support the cost figures. The cost of correcting a servicing error on one account, about $125 including staff time, refunds and borrower calls, comes from the bank's 2019 conversion, where cleanup of 2,140 accounts cost about $268,000. Temporary staffing premiums come from a staffing agency's written quote of $18 an hour above the bank's wage. Schedule delay costs about $35,000 a week, the project's average weekly spending on staff, vendors and space during the cutover phase. Regulatory restitution and legal costs for loss mitigation errors, about $25,000 per affected case, come from the compliance officer's review of recent enforcement settlements involving similar violations.

Expected Value Table

Table 1

Expected Monetary Value by Risk

Probabilities assume planned responses are in place; costs are composite estimates.

The total expected value, about $413,000, is the average cost these risks would add across many projects like this one. It does not predict the outcome of this particular project. In practice, most of these events will not occur, and one or two may cost far more than their expected value.

Three-Point Estimate on the Largest Line

R02's cost depends on how many accounts are affected. The optimistic case, about $180,000, assumes errors are caught in the first statement cycle on about 1,000 accounts. The most likely case, $435,000, assumes 3,000 accounts and a regulatory examination comment requiring a $60,000 remediation review. The pessimistic case, about $900,000, assumes errors on 6,000 accounts and a formal examination finding with restitution.

Using the weighted average common in project estimating, (optimistic + 4 x most likely + pessimistic) / 6, the mean is about $470,000, higher than the most likely figure because the range is skewed toward larger losses. The standard deviation, approximated as (pessimistic minus optimistic) / 6, is about $120,000. The PMBOK Guide describes this three-point approach as a way to reflect uncertainty in an estimate (Project Management Institute, 2017). Applying the 25 percent probability to the mean gives an expected value of about $117,500 for R02, slightly above the table's figure.

What the Numbers Show

Two observations follow. First, R02 alone carries about a quarter of the total expected value, and its pessimistic case is about three times the combined expected value of all the other lines. Spending to reduce its probability, for example a third trained analyst, is likely worth more than spreading effort across smaller risks. Second, the two lowest-probability lines, R06 and R09, have the largest costs if they occur. Their small expected values understate how much damage either would do, which is why the contingency analysis will treat them separately.

Kwak and Ingall (2007) describe Monte Carlo simulation as a way to combine distributions like these into a range of total outcomes, rather than a single sum. Hubbard (2020) makes a similar argument for replacing point estimates with ranges. A simulation using the three-point ranges would show the probability that total risk costs exceed any given contingency, and it is the next step if the steering committee wants more than the expected value.

References

Hubbard, D. W. (2020). The failure of risk management: Why it's broken and how to fix it (2nd ed.). Wiley.

Kwak, Y. H., & Ingall, L. (2007). Exploring Monte Carlo simulation applications for project management. Risk Management, 9(1), 44-57. https://doi.org/10.1057/palgrave.rm.8250017

Project Management Institute. (2017). A guide to the project management body of knowledge (PMBOK guide) (6th ed.).