Deck 1: The Nature of Risk: Losses and Opportunities

Question 1

Managing risks associated with an objective of value maximization has succeeded more than managing risks when we use the context of minimization of losses.

Answer 1

False

Question 2

The more hazardous the conditions, the greater the severity of loss.

Answer 2

True

Question 3

A firm losing its clients because of street closure would be a direct loss.

Answer 3

False

Question 4

Risk is not synonymous with uncertainty.

Question 5

Risks with a chance to either gain or lose are speculative risks.

Question 6

Hazards are critical because our ability to reduce their effects will reduce both overall costs and variability.

Question 7

Risks, which are idiosyncratic in nature, are often viewed as being amenable to having their financial consequences reduced or eliminated by holding a well-diversified portfolio.

Question 8

The notion of risk is inextricably linked to the notion of uncertainty.

Question 9

When summer humidity declines and temperature and wind velocity rise in heavily forested areas, the likelihood of fire increases.Conditions are such that a forest fire could start very easily and be difficult to contain.In this example, low humidity is a peril.

Question 10

The legal system is designed to mitigate risks and is not intended to create new risks.Therefore, it does not have the power of transferring the risk from your shoulders to mine.

Question 11

Fundamental risks are generally nonsystemic and diversifiable.

Question 12

A gambler is likely to be risk neutral.

Question 13

Market risk, such as devaluation of the dollar is an example of idiosyncratic risk.

Question 14

If a car is damaged in a collision, the time and effort required to arrange for repairs would be a consequential loss.

Question 15

Economists consider most widely held or publicly traded corporations as making decisions in a risk-neutral manner since their shareholders have the ability to diversify away risk.

Question 16

Most insurance industry contracts and education and training materials use the term "peril" to describe the enterprise, property, person, or activity facing a potential loss.

Question 17

Morale hazards involve dishonesty on the part of people who take out insurance.

Question 18

Moral and morale hazards are types of tangible hazards.

Question 19

Hazards increase the probability of losses, their frequency, their severity, or both.

Question 20

Morale hazards do not involve dishonesty.

Question 21

What is a pre-condition to the element of risk?

A)Uncertainty
B)Outcomes
C)Loss
D)Opportunity
E)Accountability

Question 22

_____ is having two potential outcomes for an event or situation.

A)Loss
B)Reliability
C)Uncertainty
D)Opportunity
E)Accountability

Question 23

Which of the following is an example of risk?

A)You could or could not get caught driving under the influence of alcohol.
B)Smoking cigarettes at various numbers per day.
C)Power plant and automobile emission of greenhouse gasses (CO2).
D)Higher car insurance rates or cancellation of auto insurance.
E)Potential variety in interest rates over time.

Question 24

A jeweler has a forward contract to reduce the risk of fluctuation in gold prices in the future.Identify the risk reduction strategy involved.

A)Securitization
B)Amortization
C)Risk retention
D)Hedging
E)Immunization

Question 25

Which of the following is an example of systemic risk for a firm?

A)Operational risk
B)Accounting risk
C)Legal risk
D)Brand risk
E)Liability risk

Question 26

If we try to get an ex-post risk measure, we can measure risk as:

A)the potential outcomes of an event.
B)difference between actual outcomes and expectations.
C)the predictability of future outcomes.
D)the predictability of actual outcomes.
E)the perceived variability of future outcomes.

Question 27

Which of the following is an example of pure risk?

A)Product success risk
B)Regulatory change risk
C)Market risk
D)Reputational risk
E)Intellectual property violation risk

Question 28

When people shy away from risks and prefer to have as much security and certainty as is reasonably affordable, they are:

A)risk seekers.
B)risk lovers.
C)risk averse.
D)risk neutral.
E)risk inviters.

Question 29

Which of the following refers to activities that are taken to reduce or eliminate risks?

A)Hedging
B)Securitization
C)Risk retention
D)Amortization
E)Depreciation

Question 30

Which of the following is the packaging and transferring of insurance risks to the capital markets through the issuance of a financial security?

A)Hedging
B)Securitization
C)Risk retention
D)Amortization
E)Depreciation

Question 31

Which of the following is an example of speculative risk?

A)Morbidity risk
B)Intellectual property violation risk
C)Premise liability risk
D)Fire risk
E)Market risk

Question 32

Economists and risk management professionals consider most people to be _____.

A)risk neutral
B)risk lovers
C)risk inviters
D)risk averse
E)risk seekers

Question 33

Rebecca has been badly injured while using a product manufactured by Huergo Manufacturing Co.Which of the following liability best explains the situation if Huergo is held liable for Rebecca's injury?

A)Customer liability
B)Product liability
C)Market liability
D)Professional liability
E)Premises liability

Question 34

Identify the risk seeker.

A)A retiree, living on fixed income, purchasing a lottery ticket.
B)An employee, selecting a health insurance plan
C)A college student, taking a summer job to pay for tuition.
D)A retiree, living on fixed income, purchasing a dividend-earning security
E)An employee, who is neither interested in insurance nor in stocks.

Question 35

Which of the following best describes pure risk?

A)Risk with a good chance of gain and a small chance of complete loss.
B)Risk with no chance of loss and some chance of gain.
C)Risk with some chance of loss or gain.
D)Risk with some chance of loss and no chance of gain
E)Risk with a good chance of gains and a good chance of complete loss.

Question 36

A firm is self-insuring against adverse contingencies out of its own cash flows.Identify the process.

A)Hedging
B)Securitization
C)Risk retention
D)Amortization
E)Depreciation

Question 37

Which of the following is an example of idiosyncratic risk for a firm?

A)Market risk
B)Accounting risk
C)Inflation risk
D)Strategic risk
E)Regulatory risk

Question 38

To differentiate between loss and risk, risk management professionals prefer to use the term perils to refer to:

A)"the causes of loss."
B)"the consequences of loss."
C)"the frequency of loss."
D)"the severity of loss."
E)"the probability of loss."

Question 39

Identify the risk averse individual.

A)Justin is willing to pay extra to have the security of knowing that unpleasant risks will be removed from his life.
B)Niomi is someone who will enter into an endeavor as long as a positive long run return on the money is possible, however unlikely.
C)Laura hopes to maximize the value of retirement investments by investing the stock market.
D)Glen will not pay extra to have risk transferred to someone else, nor will he pay to engage in a risky endeavor.
E)Ben does not pay for insurance, nor does he gamble.

Question 40

In the global credit crisis of 2008, what was the function of credit default swaps?

A)It derived or created credit for borrowers
B)It insured mortgage-backed securities
C)It guaranteed payment by the U.S.government
D)It insured insurance companies
E)It introduced financial instruments like mortgage-backed securities in the market

Question 41

Identify the natural peril that is generally insurable.

A)Volcanic eruption
B)Earthquake
C)Epidemic
D)Frost
E)Windstorm

Question 42

Which of the following statements correctly differentiate between perils and hazards?

A)Perils refer to the number of losses during a specified period and hazards refer to the average dollar value of a loss per occurrence.
B)Both perils and hazards are causes of loss; perils are tangible, hazards are intangible.
C)Perils are causes of loss; hazards are conditions that increase perils.
D)Perils are diversifiable risks; hazards are nondiversifiable risks.
E)Perils are consequences of losses; hazards are cause of losses

Question 43

In a meeting with the board of directors, the risk manager said, "There were three instances of product liability against our firm last year." He is referring to the:

A)severity of losses.
B)hazards.
C)perils.
D)frequency of losses.
E)intangibility of losses.

Question 44

Identify the hazard that generally exists when a person can gain from the occurrence of a loss.

A)Causal hazard
B)Collective hazard
C)Physical hazard
D)Morale hazard
E)Moral hazard

Question 45

What are perils? What are the different types of perils?

Question 46

Carelessness or lack of concern can be categorized as a:

A)causal hazard.
B)collective hazard.
C)physical hazard.
D)morale hazard.
E)moral hazard.

Question 47

Explain the relationship between risk and uncertainty.

Question 48

Identify the natural peril that is generally difficult to insure.

A)Windstorm
B)Heart attacks
C)Lightning
D)Earthquake
E)Natural combustion

Question 49

Explain the different types of risk attitudes.

Question 50

Craig is a reckless driver.He is careless because his Porsche is insured and he knows that losses incurred will be covered.This is an example of a:

A)morale hazard.
B)collective hazard.
C)moral hazard.
D)causal hazard.
E)physical hazard.

Question 51

Risk professionals refer to hazards as:

A)conditions that increase the cause of losses.
B)conditions that make perils insurable.
C)the number of losses during a specified period.
D)the average dollar value of a loss per occurrence.
E)conditions that reduce perils.

Question 52

Slippery roads, which often increase the number of auto accidents is an example of:

A)intangible hazards.
B)moral hazards.
C)physical hazards.
D)morale hazards.
E)causal hazards.

Question 53

Identify the human peril that is generally insurable.

A)War
B)Civil unrest
C)Vandalism
D)Terrorism
E)Radioactive contamination

Question 54

Identify the human peril that is generally difficult to insure.

A)Negligence
B)Terrorism
C)Mold
D)Vandalism
E)Fire

Question 55

How is moral hazard different from morale hazard? Explain.

Question 56

Differentiate between diversifiable and nondiversifiable risks.Provide examples for each.

Question 57

Which of the following is an economic peril?

A)E-commerce
B)Theft
C)Vandalism
D)Mold
E)Employee strikes

Question 58

In a meeting with the board of directors, the risk manager said, "Each of the product liability claims against our firm last year cost us an average of $125,000 and a total of $375,000." He is referring to the:

A)severity of losses.
B)hazards.
C)perils.
D)frequency of losses.
E)amortization of losses.

Question 59

Identify the hazards that involve behavior that can be construed as negligence or that border on criminality.

A)Causal hazard
B)Moral hazard
C)Physical hazard
D)Morale hazard
E)Collective hazard

Question 60

Write a note on enterprise risk management (ERM).

Question 61

_____ risks are those that can have their adverse consequences mitigated simply by having a well-diversified portfolio of risk exposures.

Question 62

_____ hazards are tangible environmental conditions that affect the frequency and/or severity of loss.

Question 63

Risk transfer through insurance invites _____ hazard by potentially encouraging those who transfer risks to cause losses intentionally for monetary gain.

Question 64

Risk is a(n) _____ of uncertainty.

Question 65

Apart from human and natural perils, many professionals categorize situations like employee strikes, arson for profit as _____ perils.

Question 66

_____ risk features some chance of loss and no chance of gain.

Question 67

_____ loss is caused by a third party who is considered at fault.

Question 68

_____ refers to the possibility that a manufacturer may be liable for harm caused by use of its product, even if the manufacturer was reasonable in producing it.

Question 69

Staging a car accident to collect damages from the insurance company is an example of a _____ hazard.

Question 70

The number of losses during a specified period is referred to as _____.

Question 71

_____ refers to the average dollar value of a loss per occurrence.

Question 72

According to most insurance industry contracts and education and training materials, a house built on the coast near Galveston, Texas, is called a(n) "_____" for the potentiality of loss due to a hurricane.

Question 73

_____ perils are causes of losses that lie within individuals' control.

Question 74

Poor housekeeping or careless cigarette smoking are examples of _____ hazards that increase the probability fire losses.