Six Sigma Green Belt Certification Practice Exam

Regarding risk analysis and management, how is risk calculated?

1. Risk = (length of the project) x [(probability of event) / (cost of event)]

2. Risk = (cost of event)

3. Risk = [(probability of event) / (length of the project)] x (cost of event)

4. Risk = (probability of event) x (cost of event)

The correct answer is: Risk = (probability of event) x (cost of event)

The calculation of risk is fundamentally centered around the probabilities and consequences associated with potential events. The correct formula states that risk is equal to the probability of an event occurring multiplied by the cost incurred if the event occurs. This aligns with standard risk management principles, which assess the likelihood of adverse events and their potential impact. When determining risk in project management or process improvement contexts, it's crucial to quantify how likely a risk is to occur and the potential cost associated with it. This formula enables teams to prioritize risks based on both how probable they are and how severe the consequences would be, facilitating informed decision-making and resource allocation towards risk mitigation. In this context, other options introduce variables or calculations that do not correctly reflect the relationship defined in traditional risk assessment frameworks. For example, incorporating project length or altering the structure of the equation does not align with established methods of risk calculation. The simplicity and directness of the correct formula make it an effective tool in both qualitative and quantitative risk management approaches.