hardMultiple Choice
CRISC Practice Question: A financial institution uses a quantitative risk…
A financial institution uses a quantitative risk assessment for a core banking system. The annual loss expectancy (ALE) is calculated as $500,000 with a single loss expectancy (SLE) of $2,500,000. What is the annualized rate of occurrence (ARO)?
⚠ Common exam trap
The trap here is that candidates often mistakenly invert the formula, dividing SLE by ALE to get 5.0, or confuse ARO with a percentage, leading to 0.5, instead of correctly applying ALE = SLE × ARO to solve for ARO.
Answer choices
Why each option matters
Answer the question above first, then reveal the full breakdown to understand why each option is right or wrong.
Correct answer & explanation
✓
0.2
The annualized rate of occurrence (ARO) is derived from the formula ALE = SLE × ARO. Given ALE = $500,000 and SLE = $2,500,000, solving for ARO yields $500,000 / $2,500,000 = 0.2. This means the core banking system is expected to experience a loss event once every five years on average.
Answer analysis
Option-by-option breakdown
For each option: why learners choose it and why it is or isn't the right answer here.
- ✗
5.0
Why it's wrong here
ARO is ALE divided by SLE, giving 0.2, not 5.0. Dividing SLE by ALE is tempting because it uses the same two figures, but that inversion yields the reciprocal and ignores the formula's defined relationship.
- ✗
2.0
Why it's wrong here
Dividing ALE by SLE gives 0.2, not 2.0, so this reverses the ARO formula. It is tempting because ARO values above one describe losses occurring multiple times yearly, which is legitimate for high-frequency events such as minor fraud; here the arithmetic yields one loss every five years.
- ✗
0.5
Why it's wrong here
0.5 misreads the ARO as a probability of one event every two years, whereas ARO is the expected number of losses per year: $500,000 ÷ $2,500,000 = 0.2. It tempts because halving the SLE does yield $1,250,000, but that figure is not the given ALE.
- ✓
0.2
Why this is correct
An ARO of 0.2 satisfies the stem's quantitative relationship, since ALE equals SLE multiplied by ARO. Dividing $500,000 by $2,500,000 yields 0.2, meaning the loss event is expected once every five years. This directly reconciles the given single loss expectancy with the stated annual loss expectancy.
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Written by Johnson Ajibi, MSc IT Security
Senior Network & Security Engineer · founder of Courseiva
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