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.

Accepted Answer

Managing risks with the objective of value maximization and minimizing losses are both critical aspects of risk management, and success in managing risks cannot be universally declared as better in one approach over the other. The effectiveness of either approach depends on the specific context, goals, and risk tolerance of the organization or individual.

Question 2

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

Accepted Answer

In general, more hazardous conditions increase the likelihood and potential severity of accidents or incidents, leading to greater losses.

Question 3

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

Accepted Answer

A firm losing its clients because of street closure would be considered an indirect loss, as the loss of clients is a consequence of the street closure, not a direct result of damage to the firm's property or assets.

Question 4

Risk is not synonymous with uncertainty.

Accepted Answer

Risk involves situations where the probabilities of outcomes are known, while uncertainty involves situations where the probabilities of outcomes are not known.

Question 5

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

Accepted Answer

Speculative risks involve scenarios where there is a possibility of either gain or loss, unlike pure risks which only involve the possibility of loss.

Question 6

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

Accepted Answer

Hazards are critical to address because by reducing their effects, we can lower both the direct and indirect costs associated with them, as well as decrease the variability in outcomes, leading to more predictable and manageable situations.

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.

Accepted Answer

Idiosyncratic risks, also known as unsystematic risks, are specific to a particular company or industry and can be significantly reduced or eliminated through diversification, as opposed to systematic risks which affect the entire market and cannot be mitigated just by diversification.

Question 8

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

Accepted Answer

Risk involves situations where the probabilities of outcomes are known or can be estimated, while uncertainty involves situations where these probabilities are unknown, making both concepts closely related as they deal with the unpredictability of future events.

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.

Accepted Answer

Low humidity is a hazard, not a peril. A peril is the actual cause of loss, such as fire, while a hazard is a condition that increases the likelihood or severity of a peril occurring.

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.

Accepted Answer

The legal system, through various mechanisms such as contracts, insurance, and liability laws, can indeed facilitate the transfer of risk from one party to another. This is a fundamental aspect of legal agreements and risk management strategies.

Question 11

Fundamental risks are generally nonsystemic and diversifiable.

Accepted Answer

Fundamental risks are systemic and non-diversifiable, affecting the entire economy or large numbers of persons or groups.

Question 12

A gambler is likely to be risk neutral.

Accepted Answer

A gambler is typically considered to be risk-seeking or risk-loving, meaning they derive utility from the act of gambling itself, often taking risks that have a negative expected value.

Question 13

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

Accepted Answer

Market risk, including devaluation of the dollar, affects the entire market and is therefore considered a systematic risk, not idiosyncratic risk which affects only a specific company or industry.

Question 14

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

Accepted Answer

Consequential loss refers to the secondary expenses or losses incurred as a direct result of an initial event, such as the time and effort required to arrange for repairs following a car collision.

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.

Accepted Answer

Shareholders of publicly traded corporations can diversify their investment portfolios, which allows the corporations to make decisions without needing to account for individual risk preferences, leading to a risk-neutral approach.

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.

Accepted Answer

In insurance industry contracts and education and training materials, the term "peril" is used to describe the cause of a potential loss, not the enterprise, property, person, or activity facing the potential loss.

Question 17

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

Accepted Answer

Morale hazards involve carelessness or indifference to a loss because of the existence of insurance, rather than dishonesty. Dishonesty is related to moral hazards.

Question 18

Moral and morale hazards are types of tangible hazards.

Accepted Answer

Moral and morale hazards are types of intangible hazards related to behavior and attitude, not physical or tangible risks.

Question 19

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

Accepted Answer

Hazards, by definition, are conditions or situations that increase the likelihood of a loss occurring, either by making the loss more likely to happen (increasing its frequency) or by making the loss more severe if it does happen (increasing its severity), or both.

Question 20

Morale hazards do not involve dishonesty.

Accepted Answer

Morale hazards occur when one party to a transaction has an incentive to take actions that are not in the best interests of the other party, even if those actions are not dishonest.

Quiz 1: The Nature of Risk: Losses and Opportunities