Question 1

The process of determining which set of investments in plant and equipment to undertake is called
A)regression analysis.
B)loss forecasting.
C)time value of money analysis
D)capital budgeting.

Accepted Answer

The process of determining which set of investments in plant and equipment to undertake is called capital budgeting. Capital budgeting involves analyzing and comparing potential investment opportunities based on their expected return on investment and other financial criteria. It is a key decision-making process for businesses and organizations looking to allocate their financial resources effectively. Options A, B, and C are not accurate descriptions of this process.

Question 2

A method of characterizing the relationship between two or more variables and then using the characterization to make a prediction is called
A)loss analysis.
B)time value of money analysis.
C)regression analysis.
D)capital budgeting analysis.

Accepted Answer

Regression analysis is a statistical technique used to determine the relationship between two or more variables. Once the relationship is characterized, it can be used to predict the value of one variable based on the values of the other variables. Options A, B, and D are all types of financial analysis, but they do not involve characterizing relationships between variables.

Question 3

Millie is risk manager of JKL Company.She is considering an investment in a loss control project.The project will cost $40,000.Assuming a 10 percent discount rate,the present value of the future net cash flows that this project will generate is $60,000.What is the net present value (NPV)of this project?
A)$20,000
B)$26,000
C)$60,000
D)$100,000

Accepted Answer

The net present value (NPV) is calculated by subtracting the initial investment cost from the present value of future cash flows. Here, NPV = $60,000 - $40,000 = $20,000.

Question 4

Which of the following statements concerning the securitization of risk is (are)true?
I.Securitization increases the capacity of the insurance industry.
II.Securitization can be used to protect against catastrophic loss.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Both statements are true. Securitization allows insurance companies to transfer risk to capital markets, thereby increasing their capacity to underwrite policies. It can also provide a means for protecting against catastrophic loss by pooling risks from multiple insurers and investors into a single security, providing diversification and liquidity.

Question 5

The transfer of insurable risk to the capital markets through the creation of a financial instrument is called
A)coefficient of risk.
B)securitization of risk.
C)financial risk management.
D)enterprise risk management.

Accepted Answer

The securitization of risk refers to the transfer of insurable risk to the capital markets through the creation of a financial instrument, such as an insurance-linked security (ILS) or catastrophe bond. This allows investors to assume the risk of potential losses from natural disasters or other events, providing insurers with additional sources of capital to cover potential claims.

Question 6

The total exposure that an organization is willing to accept,given the risk and return trade-off for the portfolio of risk the organization faces,is the organization's
A)risk matrix.
B)risk tolerance.
C)risk map.
D)risk appetite.

Accepted Answer

The term "risk appetite" refers to the maximum amount of risk that an organization is willing to take in pursuit of its objectives. It is determined by factors such as the organization's risk tolerance, the risk and return trade-off for the portfolio of risks faced by the organization, and the organization's overall strategic goals. Therefore, option D is the correct answer. Options A, B, and C are incorrect as they do not accurately describe the concept of risk appetite.

Question 7

A grid charting the potential frequency and severity of losses is called a
A)risk management information system.
B)risk management Intranet.
C)risk management web site.
D)risk map.

Accepted Answer

A grid charting the potential frequency and severity of losses is commonly referred to as a risk map.

Question 8

Calculating the present value of a future amount is called
A)interpolating.
B)discounting.
C)compounding.
D)regression analysis.

Accepted Answer

The process of calculating the present value of a future amount is called discounting. This involves taking into account the time value of money and reducing the future amount to the equivalent value in today's dollars. Interpolation involves estimating values between two known data points. Compounding involves calculating the future value of an investment, while regression analysis is a statistical technique for analyzing the relationship between variables.

Question 9

A computerized data base that permits risk managers to store and analyze risk management data is called a
A)risk management information system.
B)risk management Intranet.
C)risk management web site.
D)risk map.

Accepted Answer

A computerized data base that stores and analyzes risk management data is called a risk management information system (RMIS). This system allows risk managers to gather, analyze, and report on data related to specific risks and organizational exposure. It provides a comprehensive overview of the risks that an organization faces and allows risk managers to make informed decisions about risk management strategies. Other choices do not accurately describe a computerized data base for storing and analyzing risk management data.

Question 10

Uncertainty pertaining to the organization's goals and objectives and the organization's strengths,weaknesses,opportunities,and threats is called
A)operational risk.
B)strategic risk.
C)subjective risk.
D)pure risk.

Accepted Answer

Uncertainty regarding an organization's goals and strengths, weaknesses, opportunities, and threats is a typical subject of strategic risk. It refers to the uncertainty and vulnerability enforced upon an organization as it aims to make and implement decisions and strategies to accomplish its objectives.

Question 11

Which of the following statements is (are)true regarding the net present value of a capital investment?
I.Net present value does not consider time value of money.
II.A positive net present value represents an increase in value to the firm.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

I is false as net present value does consider the time value of money, i.e. it discounts future cash flows to their present value. II is true as a positive net present value indicates that the present value of the cash inflows from the investment is higher than the present value of the cash outflows, which adds value to the firm.

Question 12

Reasons to adopt an enterprise risk management plan include all of the following EXCEPT
A)to increase earnings volatility.
B)to treat risks facing the business in a more holistic way.
C)to increase net income.
D)to gain an advantage over competitors.

Accepted Answer

Adopting an enterprise risk management plan is not meant to increase earnings volatility but rather to manage risk and minimize potential negative impacts on earnings. The other options are all valid reasons to adopt such a plan.

Question 13

Hedge Fund Company offers a mutual fund to investors.Fund managers are concerned about fund volatility.They analyzed the fund to determine the worst loss likely to occur in a calendar quarter,assuming a 90 percent level of confidence.The worst probable loss is known as the fund's
A)unrealized capital gain.
B)value at risk.
C)beta coefficient.
D)surrender value.

Accepted Answer

The worst probable loss that the fund could face in a calendar quarter, assuming a 90% level of confidence, is known as the fund's value at risk (VaR).

Question 14

Terrorists attacked the World Trade Center on September 11,2001.The attack simultaneously created large losses for life insurers,property insurers,workers compensation insurers,health insurers,and liability insurers.What name is given to an event that simultaneously creates large losses in several lines of insurance?
A)speculative loss
B)clash loss
C)retroactive loss
D)consequential loss

Accepted Answer

A clash loss is an event that involves multiple lines or types of insurance policies, resulting in significant losses for insurers in different areas. The 9/11 attacks resulted in losses for life, property, workers compensation, health, and liability insurers, making it an example of a clash loss.

Question 15

Which of the following statements is (are)true with regard to the use of technology in risk management programs?
I.Risk management Intranets are networks intended for an internal audience.
II.Risk management information systems can be used to store and track workers compensation claims data.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

I is true as risk management Intranets are designed for internal communication and information sharing within an organization. 
II is also true as risk management information systems can be used to store and track workers compensation claims data along with other risk-related data to manage and analyze the risk.

Question 16

Insurance Brokerage Company uses a computer-based method of estimating the losses its clients will suffer if a severe storm or earthquake occurs.This method of estimating losses is called
A)capital budgeting.
B)securitization of risk.
C)risk mapping.
D)catastrophe modeling.

Accepted Answer

Catastrophe modeling is a computer-based method used by insurance companies to estimate the losses their clients might suffer in worst-case scenarios like severe storms, earthquakes, or other natural disasters.

Question 17

A table showing losses that could occur and the corresponding chance that each loss could occur is called a(n)
A)underwriting cycle.
B)capital budget.
C)loss distribution.
D)risk map.

Accepted Answer

A loss distribution table shows the different kinds of losses that could occur and the probability of each loss occurring. Underwriting cycle refers to the pattern of insurance premiums and losses over time. Capital budget refers to the financial plan for investment in long-term assets. A risk map is a visual representation of potential risks and their likelihood in a particular area.

Question 18

Which of the following statements is (are)true with respect to the time value of money?
I.Money received today is worth more than the same amount of money received in the future.
II.The present value of a future amount is greater than the future amount.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

I is true because it reflects the core principle of the time value of money, which states that a dollar today is worth more than a dollar in the future due to its potential earning capacity. II is incorrect because the present value of a future amount is actually less than the future amount, considering the potential for interest earnings or investment returns over time.

Question 19

LMN Insurance Company is concerned about its exposure to hurricane losses for property risks it insured on the Gulf Coast.LMN borrowed money from investors by issuing financial securities.LMN promised to repay the money it borrowed with interest if hurricane losses do not exceed a specified level.If hurricane losses exceed the specified level,LMN will repay less than it borrowed and use the extra money to fund hurricane losses.The securities that LMN issued are
A)call options.
B)futures contracts.
C)weather options.
D)catastrophe bonds.

Accepted Answer

LMN Insurance Company issued catastrophe bonds, which are a type of insurance-linked security that allow companies to transfer the risk of catastrophic events, such as hurricanes, to investors. If hurricane losses exceed a specified level, LMN will repay less than it borrowed and use the extra money to fund hurricane losses. This allows LMN to reduce its exposure to hurricane losses and provides investors with an opportunity to earn higher returns by taking on this risk.

Question 20

One category of risks that are considered in an enterprise risk management program is risks that are external to the organization.Such risks include demographic trends,acts of competitors,and industry sector trends.This risk is
A)systems risk.
B)strategic risk.
C)operational risk
D)hazard risk.

Accepted Answer

Risks that are external to the organization are considered strategic risks as they involve external factors that could affect the organization's ability to achieve its objectives and strategic goals. These risks might require the organization to adjust its strategies and plans to respond to these external factors. Systems risk refers to risks that arise from the organization's information systems, operational risk refers to risks associated with the internal processes and procedures, and hazard risk refers to risks associated with accidents and natural disasters.

Quiz 4: Enterprise Risk Management

The process of determining which set of investments in plant and equipment to undertake is called

A method of characterizing the relationship between two or more variables and then using the characterization to make a prediction is called

Which of the following statements concerning the securitization of risk is (are) true? I.Securitization increases the capacity of the insurance industry. II.Securitization can be used to protect against catastrophic loss.

The transfer of insurable risk to the capital markets through the creation of a financial instrument is called

The total exposure that an organization is willing to accept,given the risk and return trade-off for the portfolio of risk the organization faces,is the organization's

A grid charting the potential frequency and severity of losses is called a

Calculating the present value of a future amount is called

A computerized data base that permits risk managers to store and analyze risk management data is called a

Uncertainty pertaining to the organization's goals and objectives and the organization's strengths,weaknesses,opportunities,and threats is called

Which of the following statements is (are) true regarding the net present value of a capital investment? I.Net present value does not consider time value of money. II.A positive net present value represents an increase in value to the firm.

Reasons to adopt an enterprise risk management plan include all of the following EXCEPT

Hedge Fund Company offers a mutual fund to investors.Fund managers are concerned about fund volatility.They analyzed the fund to determine the worst loss likely to occur in a calendar quarter,assuming a 90 percent level of confidence.The worst probable loss is known as the fund's

Which of the following statements is (are) true with regard to the use of technology in risk management programs? I.Risk management Intranets are networks intended for an internal audience. II.Risk management information systems can be used to store and track workers compensation claims data.

Insurance Brokerage Company uses a computer-based method of estimating the losses its clients will suffer if a severe storm or earthquake occurs.This method of estimating losses is called

A table showing losses that could occur and the corresponding chance that each loss could occur is called a(n)

Which of the following statements is (are) true with respect to the time value of money? I.Money received today is worth more than the same amount of money received in the future. II.The present value of a future amount is greater than the future amount.

One category of risks that are considered in an enterprise risk management program is risks that are external to the organization.Such risks include demographic trends,acts of competitors,and industry sector trends.This risk is