CAS-002 · Question #864
The risk manager at a small bank wants to use quantitative analysis to determine the ALE of running a business system at a location which is subject to fires during the year. A risk analyst reports…
The correct answer is A. $6,000. ALE is calculated as SLE multiplied by ARO, where SLE equals asset value multiplied by exposure factor and ARO is the inverse of the recurrence interval in years.
Question
The risk manager at a small bank wants to use quantitative analysis to determine the ALE of running a business system at a location which is subject to fires during the year. A risk analyst reports to the risk manager that the asset value of the business system is $120,000 and, based on industry data, the exposure factor to fires is only 20% due to the fire suppression system installed at the site. Fires occur in the area on average every four years. Which of the following is the ALE?
Options
- A$6,000
- B$24,000
- C$30,000
- D$96,000
How the community answered
(32 responses)- A81% (26)
- B3% (1)
- C3% (1)
- D13% (4)
Why each option
ALE is calculated as SLE multiplied by ARO, where SLE equals asset value multiplied by exposure factor and ARO is the inverse of the recurrence interval in years.
SLE = $120,000 x 0.20 = $24,000; ARO = 1 / 4 years = 0.25; ALE = $24,000 x 0.25 = $6,000. This correctly applies the standard quantitative risk formulas: SLE captures the loss per incident scaled by the exposure factor, and multiplying by ARO annualizes that expected loss.
A value of $24,000 represents only the SLE and omits the annualization step of multiplying by the ARO of 0.25, overstating the annual expected loss by a factor of four.
A value of $30,000 results from incorrectly using an ARO of 1.25 or some other arithmetic error and does not follow the standard ALE = SLE x ARO formula.
A value of $96,000 represents the asset value after reducing by the exposure factor in the wrong direction and is far larger than the correctly computed ALE of $6,000.
Concept tested: Quantitative risk - ALE, SLE, ARO calculation
Source: https://csrc.nist.gov/glossary/term/annualized_loss_expectancy
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