Question 1

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

Accepted Answer

Risk inherently involves uncertainty, as it is the potential for loss or another undesirable outcome arising from a future event whose occurrence is uncertain.

Question 2

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

Accepted Answer

Uncertainty refers to situations where the outcomes cannot be predicted with complete confidence, often because there are multiple potential outcomes.

Question 3

Which of the following is an example of risk?

Accepted Answer

The answer of Which of the following is an example...

Question 4

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

Accepted Answer

Hedging is the strategy used to reduce or eliminate the risk of price fluctuations in assets such as gold. By entering into a forward contract, the jeweler locks in a future price for gold, thus protecting against potential adverse price movements.

Question 5

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

Accepted Answer

The answer of Which of the following is an example...

Question 6

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

Accepted Answer

The answer of If we try to get an ex-post...

Question 7

Which of the following is an example of pure risk?

Accepted Answer

Pure risk involves situations that can only result in a loss or no change, such as intellectual property violation, which can lead to legal consequences or financial loss.

Question 8

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

Accepted Answer

People who prefer security and certainty over taking risks are described as risk averse. This means they tend to avoid risks whenever possible, seeking safer, more predictable outcomes instead.

Question 9

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

Accepted Answer

Hedging is a strategy used in finance to reduce or eliminate the risk of adverse price movements in an asset. It involves taking an offsetting position in a related security, such as futures contracts or options, to protect against losses in the primary investment.

Question 10

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

Accepted Answer

Securitization is the process of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). In the context of insurance risks, this process involves the creation of financial instruments that allow for the transfer of insurance risk to the capital markets, thereby providing insurers with a mechanism to manage risk exposure.

Question 11

Which of the following is an example of speculative risk?

Accepted Answer

Market risk is an example of speculative risk because it involves the possibility of gain or loss due to market fluctuations, unlike the other options which typically involve pure risk, where there is only a potential for loss or no loss.

Question 12

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

Accepted Answer

Most people are considered risk averse because they prefer to avoid losses rather than acquiring equivalent gains, indicating a preference for certainty over uncertainty in economic decisions.

Question 13

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?

Accepted Answer

Product liability is the correct answer because it refers to the legal responsibility of a manufacturer or vendor of goods to compensate for injury caused by defective merchandise that it has provided for sale. If Rebecca was injured while using a product made by Huergo Manufacturing Co., and the company is held liable, it means that the injury was likely due to a defect in the product, making product liability the applicable type of liability.

Question 14

Identify the risk seeker.

Accepted Answer

A retiree living on a fixed income who purchases a lottery ticket is taking a significant risk with their limited resources, hoping for a large payoff. This behavior is characteristic of a risk seeker.

Question 15

Which of the following best describes pure risk?

Accepted Answer

The answer of Which of the following best describes pure...

Question 16

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

Accepted Answer

Risk retention is the process where a firm decides to bear the risk of loss itself rather than transferring that risk to an insurance company or another party. In this scenario, the firm is using its own cash flows to cover any adverse contingencies, which is a form of self-insurance or risk retention.

Question 17

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

Accepted Answer

Strategic risk is specific to a firm's business decisions and operations, making it an idiosyncratic risk.

Question 18

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

Accepted Answer

Perils refer to the specific causes of loss, such as fire, theft, or natural disasters, which are the events or conditions that can lead to a loss.

Question 19

Identify the risk averse individual.

Accepted Answer

Justin's willingness to pay extra to remove unpleasant risks from his life indicates a preference for security over potential gains, which is characteristic of a risk-averse individual.

Question 20

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

Accepted Answer

Credit default swaps functioned as a form of insurance for the holders of mortgage-backed securities, offering them protection against the default of these securities.

Quiz 1: The Nature of Risk: Losses and Opportunities