HKSM

A method for quantifying risk in monetary terms by estimating its Expected Monetary Value (EMV). EMV is computed by multiplying the potential financial impact by the probability of occurrence, using the customer-provided probability estimate.

Key Points

• Formula: EMV = probability x monetary impact (negative for threats, positive for opportunities).
• Used in quantitative risk analysis to prioritize risks and size contingency reserves.
• Can be applied to individual risks and aggregated across multiple risks or decision tree branches.
• Relies on realistic probability and impact estimates; document assumptions behind the numbers.

Example

A supplier delay could add $50,000 in costs, and the customer estimates a 30% chance of it occurring. EMV = 0.30 x -$50,000 = -$15,000. The project may allocate $15,000 to the contingency reserve for this risk.

PMP Example Question

A risk has a 25% probability of causing $80,000 in extra costs. What is the EMV of this risk?

1. $80,000
2. -$20,000
3. $20,000
4. -$80,000

Correct Answer: B — -$20,000

Explanation: EMV = probability x impact = 0.25 x -$80,000 = -$20,000. Threats have negative EMV.