What does Annual Loss Expectancy (ALE) estimate?

Annual Loss Expectancy (ALE) is a key metric in risk management that estimates the potential annual cost of a realized threat. This figure is calculated by considering both the impact of a specific risk if it were to occur and the likelihood of that risk happening over the course of a year.

To determine ALE, organizations typically use the following formula:

ALE = Single Loss Expectancy (SLE) * Annual Rate of Occurrence (ARO).

Here, Single Loss Expectancy represents the potential monetary loss from a single incident, while Annual Rate of Occurrence represents how many times that incident is expected to occur in a year. By combining these two elements, ALE provides a financial projection of potential losses, which is essential for informing decision-making about risk management strategies and investment in security controls.

The other options pertain to different aspects of risk assessment, such as occurrence frequency and asset value, but they do not specifically address the calculation and forecasting of financial losses from threats that ALE directly measures.