Approach 3 Risk Model II

The goal of Approach 3 is to append an operational risk term to the mean-risk model formulation in Approach 2 to account for the significance of both financial risk (as considered by Approach 1) and operational risk in decision-making. 

Variance for the various expected recourse penalty for the second-stage costs Vs is derived as  

Note that the index s and the corresponding set S is used to denote scenarios for the evaluation of the inner expectation term to distinguish them from the original index s used to represent the scenarios. Vs is weighted by the operational risk factor 02 e (0, oo). The formulation of Risk Model II is  

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