Question 1

An earthquake is an example of

Accepted Answer

An earthquake is a type of peril, which refers to the cause of loss, damage or destruction. In this case, an earthquake can cause damage or destruction to property and potentially harm individuals. Moral hazard refers to the increased likelihood of risk-taking behavior due to insurance protection, and physical hazard refers to the potential presence of a physical condition that increases the likelihood of loss, such as a slippery floor. Objective risk refers to a measurable chance of loss or peril occurring.

Question 2

The premature death of an individual is an example of

Accepted Answer

A premature death is an example of a pure risk because it involves the possibility of loss or no loss, without any chance of gain. It is also not under the control of the individual and is unforeseen, making it uncontrollable and unpredictable.

Question 3

Carelessness or indifference to a loss is an example of

Accepted Answer

D

Question 4

Faking an accident to collect insurance proceeds is an example of

Accepted Answer

Faking an accident to collect insurance proceeds is an example of moral hazard, which refers to the increased likelihood of a loss due to a person's dishonest or fraudulent behavior. Moral hazard can arise when a person has an incentive to engage in risky or illegal behaviors because they know they will be protected by insurance.

Question 5

An individual's personal estimate of the chance of loss is

Accepted Answer

An individual's personal estimate of the chance of loss is a subjective probability as it is based on their own perception and opinion rather than a statistical calculation or objective fact.

Question 6

Katelyn was just named Risk Manager of ABC Company.She has decided to create a risk management program which considers all of the risks faced by ABC-pure,speculative,operational,and strategic-in a single risk management program.Such a program is called a(n)

Accepted Answer

An enterprise risk management program considers all types of risks faced by a company, including pure, speculative, operational, and strategic risks. It is a comprehensive approach to managing risks across the entire organization. Financial, fundamental, and consequential risk management programs may focus on specific types of risks or consequences, but do not provide the same level of comprehensive risk management as an ERM program.

Question 7

Which of the following statements about a priori probabilities is correct?

Accepted Answer

A priori probabilities are objective probabilities that can be determined by deductive reasoning based on logical analysis of the available information. They do not depend on individual perceptions or subjective factors like age, gender, education, or alcohol use.

Question 8

Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss.This hazard is called

Accepted Answer

The characteristics of the judicial system and regulatory environment increase the frequency and severity of loss, which falls under the legal hazard. Legal hazard is the risk of loss arising from legal or regulatory changes or challenges that affect an organization's operations or assets. It includes factors such as litigation, regulation, legislation, and contractual liability. Therefore, legal hazard is the best choice in this scenario.

Question 9

Uncertainty based on a person's mental condition or state of mind is known as

Accepted Answer

Uncertainty that exists due to a person's mental condition or state of mind is known as subjective risk. It reflects an individual's own perception of risk, which may vary from person to person. Objective risk, on the other hand, is a measurable risk that exists independent of an individual's perception or opinion. Objective probability refers to the likelihood of an event occurring based on statistical data or analysis, whereas subjective probability refers to an individual's personal belief or estimation of the likelihood of an event occurring.

Question 10

Objective risk is defined as

Accepted Answer

Objective risk is the relative variation of actual loss from expected loss. It is a measurable concept and is based on statistical analysis of data. It is different from subjective risk, which is based on a person's mental condition or state of mind. Probability of loss (option A) is a component of objective risk but not the definition of it. Cause of loss (option D) refers to the reason why a loss occurred and is not a definition of objective risk.

Question 11

Which of the following statements about financial risk is (are)true?
I.Enterprise risk does not include financial risk.
II.Financial risk is easily addressed through the purchase of insurance.

Accepted Answer

Enterprise risk includes financial risk as one of its components, encompassing a wide range of risks such as credit risk, market risk, and liquidity risk. Financial risk is not easily addressed through the purchase of insurance because it involves aspects like market volatility and credit risk, which cannot be simply insured against.

Question 12

Dense fog that increases the chance of an automobile accident is an example of

Accepted Answer

Dense fog is a physical hazard because it is a condition that can cause damage to property or injury to people.

Question 13

Taylor Tobacco Company is concerned that the company may be held liable in a court of law and ordered to pay a large damage award.The characteristics of the judicial system that increase the frequency and severity of loss are known as

Accepted Answer

Legal hazard refers to the characteristics of the legal system that increase the frequency and severity of loss, such as the potential for large damage awards in court. Moral hazard refers to the tendency for individuals to take increased risks because they are protected against losses, particular risk refers to the risk of loss that is unique to a specific individual or entity, and speculative risk refers to the possibility of either gain or loss.

Question 14

A name that encompasses all of the major risks faced by a business firm is

Accepted Answer

Enterprise risk encompasses all of the major risks faced by a business firm, including financial risk, speculative risk, and pure risk. It refers to the comprehensive management of all potential risks and uncertainties that may affect the company's objectives, operations, and financial performance.

Question 15

The long-run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called

Accepted Answer

The definition given in the question is that of objective probability. This type of probability is based on observed data where the underlying conditions remain constant over an infinite number of observations. It is also sometimes referred to as long-run probability or statistical probability.

Question 16

One of the speculative financial risks considered in an enterprise risk management program is the risk of loss because of adverse changes in commodity prices,interest rates,foreign exchange rates,and the value of money.This risk is called

Accepted Answer

The risk of loss due to adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money falls under the category of financial risk. This type of risk can significantly impact an organization's financial performance and can be managed through hedging strategies, diversification, and financial risk management techniques.

Question 17

A peril is

Accepted Answer

The answer of A peril is
...

Question 18

Traditionally,risk has been defined as

Accepted Answer

The definition of risk is uncertainty concerning the occurrence of loss. While options A, B, and D mention probability and loss, they do not capture the essence of risk which is the uncertainty or unpredictability of an outcome.

Question 19

An insurance company estimates its objective risk for 10,000 exposures to be 10 percent.Assuming the probability of loss remains the same,what would happen to the objective risk if the number of exposures were to increase to 1 million?

Accepted Answer

Objective risk decreases as the number of exposures increases, due to the law of large numbers, which states that as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience.

Question 20

A pure risk is defined as a situation in which there is

Accepted Answer

A pure risk only involves the possibility of loss or no loss - there is no possibility of profit or gain. This type of risk is typically insurable, as insurance companies are able to provide coverage against potential losses. Choices B, C, and D are all incorrect because they suggest some possibility of profit or gain, which is not applicable in a pure risk situation.

Quiz 1: Risk and Its Treatment