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of 10,000,000.

       Annualized Loss Expectancy The annualized loss expectancy (ALE) is the possible yearly loss of all instances of a specific realized threat against a specific asset. The ALE is calculated using the following formula:ALE = single loss expectancy (SLE) * annualized rate of occurrence (ARO)orALE = asset value (AV) * exposure factor (EF) * annualized rate of occurrence (ARO)or more simply:ALE = SLE * AROorALE = AV * EF * AROFor example, if the SLE of an asset is $90,000 and the ARO for a specific threat (such as total power loss) is .5, then the ALE is $45,000. If the ARO for a specific threat (such as compromised user account) is 15 for the same asset, then the ALE would be $1,350,000.

      The task of calculating EF, SLE, ARO, and ALE for every asset and every threat/risk is a daunting one. Fortunately, quantitative risk assessment software tools can simplify and automate much of this process. These tools produce an asset inventory with valuations and then, using predefined AROs along with some customizing options (industry, geography, IT components, and so on), produce risk analysis reports.

Once an ALE is calculated for each asset-threat pairing, then the entire collection should be sorted from largest ALE to smallest. Although the actual number of the ALE is not an absolute number (it is an amalgamation of intangible and tangible value multiplied by a future prediction of loss multiplied by a future prediction of likelihood), it does have relative value. The largest ALE is the biggest problem the organization is facing and thus the first risk to be addressed in risk response.

      The “Cost vs. Benefit of Security Controls” section, later in this chapter, discusses the various formulas associated with quantitative risk analysis that you should be familiar with.

Both the quantitative and qualitative risk analysis mechanisms offer useful results. However, each technique involves a unique method of evaluating the same set of assets and risks. Prudent due care requires that both methods be employed in order to obtain a balanced perspective on risk. Table 2.1 describes the benefits and disadvantages of these two systems.

TABLE 2.1 Comparison of quantitative and qualitative risk analysis

Characteristic	Qualitative	Quantitative
Employs math functions	No	Yes
Uses cost/benefit analysis	May	Yes
Requires estimation	Yes	Some
Supports automation	No	Yes
Involves a high volume of information	No	Yes
Is objective	Less so	More so
Relies substantially on opinion	Yes	No
Requires significant time and effort	Sometimes	Yes
Offers useful and meaningful results	Yes	Yes

      At this point, the risk management process shifts from risk assessment to risk response. Risk assessment is used to identify the risks and set criticality priorities, and then risk response is used to determine the best defense for each identified risk.

      Risk Responses

      Whether a quantitative or qualitative risk assessment was performed, there are many elements of risk response that apply equally to both approaches. Once the risk analysis is complete, management must address each specific risk. There are several possible responses to risk:

       Mitigation or reduction

       Assignment or transfer

       Deterrence

       Avoidance

       Acceptance

       Reject or ignore

      These risk responses are all related to an organization's risk appetite and risk tolerance. Risk appetite is the total amount of risk that an organization is willing to shoulder in aggregate across all assets. Risk capacity is the level of risk an organization is able to shoulder. An organization's desired risk appetite may be greater than its actual capacity. Risk tolerance is the amount or level of risk that an organization will accept per individual asset-threat pair. This is often related to a risk target, which is the preferred level of risk for a specific asset-threat pairing. A risk limit is the maximum level of risk above the risk target that will be tolerated before further risk management actions are taken.

      You need to know the following information about the possible risk responses:

       Risk Mitigation Reducing risk, or risk mitigation, is the implementation of safeguards, security controls, and countermeasures to reduce and/or eliminate vulnerabilities or block threats. Deploying encryption and using firewalls are common examples of risk mitigation or reduction. Elimination of an individual risk can sometimes be achieved, but typically some risk remains even after mitigation or reduction efforts.

       Risk Assignment Assigning risk or transferring risk is the placement of the responsibility of loss due to a risk onto another entity or organization. Purchasing cybersecurity or traditional insurance and outsourcing are common forms of assigning or transferring risk. Also known as assignment of risk and transference of risk.

       Risk Deterrence Risk deterrence is the process of implementing deterrents to would-be violators of security and policy. The goal is to convince a threat agent not to attack. Some examples include implementing auditing, security cameras, and warning banners; using security guards; and making it known that the organization is willing to cooperate with authorities and prosecute those who participate in cybercrime.

       Risk Avoidance Risk avoidance is the process of selecting alternate options or activities that have less associated risk than the default, common, expedient, or cheap option. For example, choosing to fly to a destination instead of driving to it is a form of risk avoidance. Another example is to locate a business in Arizona instead of Florida to avoid hurricanes. The risk is avoided by eliminating the risk cause. A business leader terminating a business endeavor because it does not align with organizational objectives and that has a high risk versus reward ratio is also an example of risk avoidance.

       Risk Acceptance Accepting risk, or acceptance of risk, is the result after a cost/benefit analysis shows countermeasure costs would outweigh the possible cost of loss due to a risk. It also means that management has agreed to accept the consequences and the loss if the risk is realized. In most cases, accepting risk requires a clearly written statement that indicates why a safeguard was not implemented, who is responsible for the decision, and who will be responsible for the loss if the risk is realized, usually in the form of a document signed by senior management.

       Risk Rejection An unacceptable possible response to risk is to reject risk or ignore risk. Denying that a risk exists and hoping that it will never be realized are not valid or prudent due care/due diligence responses to risk. Rejecting or ignoring risk may be considered negligence in court.

      Legal and in Compliance

      Every

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