FACULTAD DE CIENCIAS FISICO-MATEMATICAS
Homework 5
Análisis y Administración del Riesgo
José Armando López Flores
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Homework 5
Análisis y Administración del Riesgo
José Armando López Flores
Expected Monetary Value (EMV)
Expected monetary value is a value based on probability that factors in all possible
monetary outcomes of a given situation. The value is reached by multiplying the
percentage of each possibility occurring by the monetary loss or gain associated
with that outcome. At that point all of those values, positive and negative, are
combined to reach the expected monetary value. This calculation is a valuable tool
for those tasked with making a decision involving several possible outcomes, as it
represents the most statistically accurate estimation of the eventual result.
The ideal situation in making a decision would be to know the outcome before the
decision is made, especially when it comes to ones involving money. Since that
isn't the case, calculating the expected monetary value is a good way to come to
the most informed monetary decision possible. It's an especially valuable tool
for risk management assessments because of the way it takes into account all
possible scenarios in a given decision.
Analysis for the following case:
Suppose you are leading a construction project. Weather, cost of construction
material, and labor turmoil are key project risks found in most construction projects:
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Project Risks 1 - Weather: There is a 25% chance of excessive snow fall
that’ll delay the construction for two weeks which will, in turn, cost the
project $80,000.
Project Risks 2 - Cost of Construction Material: There is a 10% probability of
the price of construction material dropping, which will save the project
$100,000.
Project Risks 3 - Labor Turmoil: There is a 5% probability of construction
coming to a halt if the workers go on strike. The impact would lead to a loss
of $150,000. Note that in some parts of the world where unions are strong,
strikes are very common and hence would have a higher probability.
What is the project’s Expected Monetary Value based on those project risks?
FACULTAD DE CIENCIAS FISICO-MATEMATICAS
LSTI
Homework 5
Análisis y Administración del Riesgo
José Armando López Flores
Weather= (0*0.75+(-80,000)*0.25)
Cost of constrution material=(0.10*100,000+0.90*0)
Labor Turmoil=(0.95*0+(-150,00)*0.05)
Constrution project= - (20.000) + ( 10.000) - (7.500) = - $ 17,500
Therefore, if all risks occur in the construction project, the project would lose
$17,500.
FACULTAD DE CIENCIAS FISICO-MATEMATICAS
LSTI