Exam

Name___________________________________

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