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MULTIPLECHOICE.Choosetheonealternativethatbestcompletesthestatementoranswersthequestion.
1) Traditionally,riskhasbeendefinedas
A) anysituationinwhichtheprobabilityoflossiszero.
B) theprobabilityofalossoccurring.
C) uncertaintyconcerningtheoccurrenceofloss.
D) anysituationinwhichtheprobabilityoflossisone.
1)
2) Objectiveriskisdefinedas
A) thecauseofloss.
B) theprobabilityofloss.
C) therelativevariationofactuallossfromexpectedloss.
D) uncertaintybasedonapersonsmentalconditionorstateofmind.
2)
3) Aninsurancecompanyestimatesitsobjectiveriskfor10,000exposurestobe10percent.Assuming
theprobabilityoflossremainsthesame,whatwouldhappentotheobjectiveriskifthenumberof
exposuresweretoincreaseto1million?
A) Itwoulddecreaseto5percent.
B) Itwouldremainthesame.
C) Itwoulddecreaseto1percent.
D) Itwouldincreaseto20percent.
3)
4) Uncertaintybasedonapersonsmentalconditionorstateofmindisknownas
A) objectiveprobability.
B) subjectiveprobability.
C) subjectiverisk.
D) objectiverisk.
4)
5) Thelong-runrelativefrequencyofaneventbasedontheassumptionofaninfinitenumberof
observationswithnochangeintheunderlyingconditionsiscalled
A) subjectiverisk.
B) objectiveprobability.
C) subjectiveprobability.
D) objectiverisk.
5)
6) Whichofthefollowingstatementsaboutapriori probabilitiesiscorrect?
A) Theyareobjectiveprobabilitiesthatcanbedeterminedbydeductivereasoning.
B) Theyaresubjectiveprobabilitiesthatmayvaryamongindividualsbecauseoffactorssuchas
age,gender,education,andtheuseofalcohol.
C) Theyareobjectiveprobabilitiesthatcanbedeterminedbysubjectivereasoning.
D) Theyaresubjectiveprobabilitiesbasedonambiguityinthewayprobabilityisperceived.
6)
7) Anindividualspersonalestimateofthechanceoflossis
A) asubjectiveprobability.
B) anapriori probability.
C) anobjectiverisk.
D) anobjectiveprobability.
7)
8) Aperilis
A) aconditionwhichincreasesthechanceofaloss.
B) theprobabilitythatalosswilloccur.
C) thecauseofaloss.
D) amoralhazard.
8)
9) Anearthquakeisanexampleof
A) amoralhazard.
C) aphysicalhazard.
9)
B) anobjectiverisk.
D) aperil.
10) Densefogthatincreasesthechanceofanautomobileaccidentisanexampleof
A) aphysicalhazard.
B) amoralhazard.
C) aperil.
D) aspeculativerisk.
10)
11) Fakinganaccidenttocollectinsuranceproceedsisanexampleof
A) attitudinalhazard.
B) objectiverisk.
C) moralhazard.
D) physicalhazard.
11)
12) Carelessnessorindifferencetoalossisanexampleof
A) moralhazard.
B) objectiveprobability.
C) attitudinalhazard.
D) physicalhazard.
12)
13) Somecharacteristicsofthejudicialsystemandregulatoryenvironmentincreasethefrequencyand
severityofloss.Thishazardiscalled
A) attitudinalhazard.
B) legalhazard.
C) physicalhazard.
D) moralhazard.
13)
14) TaylorTobaccoCompanyisconcernedthatthecompanymaybeheldliableinacourtoflawand
orderedtopayalargedamageaward.Thecharacteristicsofthejudicialsystemthatincreasethe
frequencyandseverityoflossareknownas
A) legalhazard.
B) speculativerisk.
C) particularrisk.
D) moralhazard.
14)
15) Anamethatencompassesallofthemajorrisksfacedbyabusinessfirmis
A) purerisk.
B) financialrisk.
C) speculativerisk.
D) enterpriserisk.
15)
16) Whichofthefollowingstatementsaboutfinancialriskis(are)true?
I. Enterpriseriskdoesnotincludefinancialrisk.
II. Financialriskiseasilyaddressedthroughthepurchaseofinsurance.
A) Ionly
B) IIonly
C) bothIandII
16)
D) neitherInorII
17) Oneofthespeculativefinancialrisksconsideredinanenterpriseriskmanagementprogramisthe
riskoflossbecauseofadversechangesincommodityprices,interestrates,foreignexchangerates,
andthevalueofmoney.Thisriskiscalled
A) operationalrisk.
B) strategicrisk.
C) financialrisk.
D) propertyrisk.
17)
18) KatelynwasjustnamedRiskManagerofABCCompany.Shehasdecidedtocreatearisk
managementprogramwhichconsidersalloftherisksfacedbyABCpure,speculative,
operational,andstrategicinasingleriskmanagementprogram.Suchaprogramiscalleda(n)
A) enterpriseriskmanagementprogram.
B) financialriskmanagementprogram.
C) fundamentalriskmanagementprogram.
D) consequentialriskmanagementprogram.
18)
19) Apureriskisdefinedasasituationinwhichthereis
A) apossibilityofeitherprofitorloss.
B) apossibilityofneitherprofitnorloss.
C) onlythepossibilityofprofit.
D) onlythepossibilityoflossornoloss.
19)
20) Theprematuredeathofanindividualisanexampleof
A) aspeculativerisk.
B) apurerisk.
C) anondiversifiablerisk.
D) aphysicalhazard.
20)
21) Whichofthefollowingstatementsaboutspeculativerisksistrue?
A) Theyarealmostalwaysinsurablebyprivateinsurers.
B) Theyaremoreeasilypredictablethanpurerisks.
C) Theyinvolveonlyachanceofloss.
D) Theymaybenefitsocietyeventhoughalossoccurs.
21)
22) Anautomobilethatisatotallossasaresultofacollisionisanexampleofwhichofthefollowing
typesofrisk?
I. Speculativerisk
II. Diversifiablerisk
A) Ionly
B) IIonly
C) bothIandII
D) neitherInorII
22)
23) AllofthefollowingareprogramstoinsurefundamentalrisksEXCEPT
A) SocialSecurity.
B) autophysicaldamageinsurance.
C) federallysubsidizedfloodinsurance.
D) unemploymentinsurance.
23)
24) AllofthefollowingareexamplesofpersonalrisksEXCEPT
A) poorhealth.
B) prematuredeath.
C) unemployment.
D) lossofbusinessincome.
24)
25) Whichofthefollowingisareasonwhyprematuredeathmayresultineconomicinsecurity?
I. Additionalexpensesassociatedwithdeathmaybeincurred.
II. Theincomeofthedeceasedpersonsfamilymaybeinadequatetomeetitsbasicneeds.
A) Ionly
B) IIonly
C) bothIandII
D) neitherInorII
25)
26) Whichofthefollowingis(are)oftenconsequencesoflong-termdisability?
I. Continuingmedicalexpenses
II. Lossorreductionofemployeebenefits
A) Ionly
B) IIonly
C) bothIandII
26)
D) neitherInorII
27) Whichofthefollowingisanexampleofconsequential(indirect)loss?
A) thevandalismofapersonsautomobile
B) thedestructionofafirmsmanufacturingplantbyanearthquake
C) thetheftofapersonsjewelry
D) thecostofrentingasubstitutevehiclewhileacollision-damagedcarisbeingrepaired
27)
28) Theextraexpenseincurredbyabusinesstostayinoperationfollowingafireisanexampleofa(n)
A) speculativerisk.
B) indirectloss.
C) directloss.
D) fundamentalrisk.
28)
29) Whichofthefollowingstatementsaboutliabilityrisksis(are)true?
I. Futureincomeandassetscanbeattachedtopayjudgmentsifinadequateinsuranceiscarried.
II. Thereisanupperlimitontheamountofloss.
A) Ionly
B) IIonly
C) bothIandII
D) neitherInorII
29)
30) AllofthefollowingareburdenstosocietybecauseofthepresenceofriskEXCEPT
A) Riskprovidesanincentiveforpeopletoengageinlosscontrol.
B) Thesizeofanemergencyfundmustbeincreased.
C) Societyisdeprivedofcertaingoodsandservices.
D) Mentalfearandworryarepresent.
30)
31) Losscontrolincludeswhichofthefollowing?
I. Lossreduction
II. Lossprevention
A) Ionly
B) IIonly
31)
C) bothIandII
32) Followinggoodhealthhabitscanbecategorizedas
A) personalinsurance.
C) noninsurancetransfer.
B) riskretention.
D) lossprevention.
D) neitherInorII
32)
33) Fromtheinsuredsperspective,theuseofdeductiblesininsurancecontractsisanexampleof
A) riskcontrol.
B) risktransfer.
C) riskavoidance.
D) riskretention.
33)
34) Theuseoffire-resistivematerialswhenconstructingabuildingisanexampleof
A) riskretention.
B) riskcontrol.
C) risktransfer.
D) riskavoidance.
34)
35) AllofthefollowingstatementsaboutriskretentionaretrueEXCEPT
A) Itmaybeusedintentionallyifcommercialinsuranceisunavailable.
B) Itmaybeusedpassivelybecauseofignorance.
C) Itsuseresultsincostsavingsiflossesarelessthanthecostofinsurance.
D) Itsuseismostappropriateforlow-frequency,high-severitytypesofrisks.
35)
36) Whichofthefollowingisanexampleofanoninsurancerisktransfer?
A) notengagingindangerousactivities
B) usingnonflammablebuildingmaterialwhenconstructingahouse
C) enteringintoahold-harmlessagreement
D) installingsmokedetectorsinyourhome
36)
37) Curtborrowedmoneyfromabanktopurchaseafishingboat.Hepurchasedpropertyinsuranceon
theboat.Curthaddifficultymakingloanpaymentsbecausehedidnotcatchmanyfish,andfish
priceswerelow.Curtintentionallysunktheboat,collectedfromhisinsurer,andpaidofftheloan
balance.Thisscenarioillustratestheproblemof
A) adverseselection.
B) attitudinalhazard.
C) nondiversifiablerisk.
D) moralhazard.
37)
38) Jennaopenedasuccessfulrestaurant.Onenight,aftertherestauranthadclosed,afirestartedwhen
theelectricalsystemmalfunctioned.Inadditiontothephysicaldamagetotherestaurant,Jennalost
profitsthatcouldhavebeenearnedwhiletherestaurantwasclosedforrepairs.Thelostprofitsare
anexampleof
A) nondiversifiablerisk.
B) speculativerisk.
C) indirectloss.
D) directloss.
38)
39) Bradstartedapestcontrolbusiness.Toprotecthispersonalassetsagainstliabilityarisingoutofthe
business,Bradincorporatedthebusiness.Bradsuseofthecorporateformoforganizationtoshield
againstpersonalliabilityclaimsillustrates
A) noninsurancetransfer.
B) fundamentalrisk.
C) riskretention.
D) objectiverisk.
39)
40) ABCInsuranceCompanyplanstosellhomeownersinsuranceinfiveWesternstates.ABCexpects
that8homeownersoutofevery100,onaverage,willreportclaimseachyear.Thevariation
betweentherateoflossthatABCexpectstooccurandtherateoflossthatactuallydoesoccuris
called
A) objectiverisk.
B) subjectiverisk.
C) subjectiveprobability.
D) objectiveprobability.
40)
41) WilliamsCompanyinstalledsmokedetectors,asprinklersystem,andfireextinguishersinitsnew
manufacturingfacility.Thesedevicesareallexamplesof
A) riskavoidance.
B) riskretention.
C) noninsurancetransfer.
D) risk control.
41)
42) Whichofthefollowingstatementsabouthedgingis(are)true?
I. Hedgingisaformofrisktransfer.
II. Hedgingisusedtoaddresstheriskofunfavorablepricefluctuations.
A) Ionly
B) IIonly
C) bothIandII
42)
D) neitherInorII
43) Cathyscarhitapatchoficeontheroad.Thecarskiddedofftheroadandhitatree.Thepresence
oficeontheroadisbestdescribedasa(n)
A) indirectloss.
B) physicalhazard.
C) subjectiverisk.
D) peril.
43)
44) JimandPaulaFranklinstartedadrycleaningbusiness.Thebusinessmaybesuccessfuloritmay
fail.Thetypeofriskthatispresentwheneitheraprofitorlosscouldoccuriscalled
A) speculativerisk.
B) nondiversifiablerisk.
C) subjectiverisk.
D) purerisk.
44)
45) Benisconcernedthatifheinjuressomeoneordamagessomeonespropertyhecouldbeheld
legallyresponsibleandrequiredtopaydamages.Thistypeofriskiscalleda
A) liabilityrisk.
B) propertyrisk.
C) nondiversifiablerisk.
D) speculativerisk.
45)
46) MLXDrugCompanywouldliketomarketanewhypertensiondrug.WhiletheFoodandDrug
Administration(FDA)wastestingthedrug,itdiscoveredthatthedrugproducedaharmfulside
effect.WhenMLXlearnedoftheFDAstestresult,MLXabandoneditsplantoproduceand
distributethedrug.MLXsreactionillustrates
A) riskretention.
B) hedging.
C) riskavoidance.
D) risktransfer.
46)
47) ABCHealthInsuranceCompanysellshealthinsuranceinonestate.Recently,thatstateslegislature
passedalawforbiddinghealthinsurersfromconsideringanindividualshealthhistorywhen
selectingapplicantstoinsure.Thischangeinlawwillincreasethepossibilityofunprofitableresults
forABC.Thistypeofhazardisanexampleof
A) physicalhazard.
B) legalhazard.
C) attitudinalhazard.
D) moralhazard.
47)
48) AllofthefollowingarecharacteristicsoftheliabilityriskthatmostpeoplefaceEXCEPT
A) thereisnoupperlimitontheamountoftheloss.
B) substantiallegalexpensesmaybeincurreddefendingtheclaim.
C) alienmaybeplacedonyourincomeandassetstosatisfyalegaljudgment.
D) owningliabilityinsuranceeliminatesthepossibilityofbeingheldlegallyliable.
48)
49) Whichofthefollowingstatementsaboutchanceoflossandriskis(are)true?
I. Ifthechanceoflossisidenticalfortwogroups,theobjectiveriskmustbethesame.
II. Twoindividualsmayperceivedifferentlytheriskinherentinagivenactivity.
A) Ionly
B) IIonly
C) bothIandII
D) neitherInorII
49)
50) Ariskthataffectsonlyindividualsorsmallgroupsandnottheentireeconomyiscalleda
A) purerisk.
B) nondiversifiablerisk.
C) diversifiablerisk.
D) speculativerisk.
50)
51) Whichofthefollowingisanexampleofacommercialrisk?
A) theriskofbeingunemployed
B) theriskofinsufficientretirementincome
C) thelossofbusinessincome
D) theriskofprematuredeath
51)
52) Aspecialformofplannedretentionbywhichpartorallofagivelossexposureisretainedbythe
firmiscalled
A) self-insurance.
B) noninsurancetransfer.
C) hedging.
D) passiveretention.
52)
53) TheproductionfacilityforABCManufacturingislocatedinafloodplain.Althoughtheriskof
floodislow,ABCsriskmanagerisconcernedthatafloodcoulddamagetheplantandequipment.
Hegotbidsonfloodinsurancefromtwoinsuranceagents,butdecidedthecostofcoveragewastoo
highrelativetotherisk.Sohedidnotpurchasefloodinsurance.Whichriskmanagementtechnique
isABCusingwithrespecttotheriskofflood?
A) activeretention
B) passiveretention
C) avoidance
D) noninsurancetransfer
53)
54) Astudentwhohasskippedmanyclassesandnotstudiedthecoursematerialwassurprisedto
learntherewasatestwhenheshowed-upforclass.Thestudentsmentaluncertaintyabout
whetherornothewillpassthetestiscalled
A) objectiverisk.
B) subjectiverisk.
C) subjectiveprobability.
D) objectiveprobability.
54)
55) Rapidinflation,cyclicalunemployment,war,hurricanes,andfloodsareallexamplesof
A) physicalhazards.
B) speculativerisks.
C) nondiversifiablerisks.
D) diversifiablerisks.
55)
56) Fiveyearsago,Shannondecidedtostartinvesting.ShelikesABCTelecomCompany,andshe
investsinthecompanyeachmonth.AsABCTelecomistheonlycompanyinwhichsheinvests,
Shannonsfinancialwell-beingwillbeharmedifthepriceofABCTelecomstockdrops
significantly.TheriskofinvestmentlosscanbereducedifShannoninvestsinothercompaniesand
othertypesoffinancialassets.ForShannon,theriskshefaceswithregardtoherinvestmentsisa(n)
A) nondiversifiablerisk.
B) enterpriserisk.
C) purerisk.
D) diversifiablerisk.
56)
AnswerKey
Testname:UNTITLED1
1) C
2) C
3) C
4) C
5) B
6) A
7) A
8) C
9) D
10) A
11) C
12) C
13) B
14) A
15) D
16) D
17) C
18) A
19) D
20) B
21) D
22) B
23) B
24) D
25) C
26) C
27) D
28) B
29) A
30) A
31) C
32) D
33) D
34) B
35) D
36) C
37) D
38) C
39) A
40) A
41) D
42) C
43) B
44) A
45) A
46) C
47) B
48) D
49) B
50) C
8
AnswerKey
Testname:UNTITLED1
51) C
52) A
53) A
54) B
55) C
56) D