Test Bank for Principles Of Risk Management And Insurance, 14th Edition

Preview (16 of 433 Pages)

100%

Purchase to unlock

Loading page image...

1Principles of Risk Management and Insurance, 14e(Rejda)Chapter 1Risk and Its Treatment1) Traditionally, risk has been defined asA) any situation in which the probability of loss is one.B) any situation in which the probability of loss is zero.C) uncertainty concerning the occurrence of loss.D) the probability of a loss occurring.Answer: CDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge2) Objective risk is defined asA) the probability of loss.B) the relative variation of actual loss from expected loss.C) uncertainty based on a person's mental condition or state of mind.D) the cause of loss.Answer: BDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge3) 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 ifthe number of exposures were to increase to 1 million?A) It would decrease to 1 percent.B) It would decrease to 5 percent.C) It would remain the same.D) It would increase to 20 percent.Answer: ADiff: 3Question Status: Previous EditionAACSB: Analytical Thinking4) Uncertainty based on a person's mental condition or state of mind is known asA) objective risk.B) subjective risk.C) objective probability.D) subjective probability.Answer: BDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge

Loading page image...

25) The long-run relative frequency of an event based on the assumption of an infinite number ofobservations with no change in the underlying conditions is calledA) objective probability.B) objective risk.C) subjective probability.D) subjective risk.Answer: ADiff: 1Question Status: Previous EditionAACSB: Application of Knowledge6) Which of the following statements abouta prioriprobabilities is correct?A) They are subjective probabilities based on ambiguity in the way probability is perceived.B) They are subjective probabilities that may vary among individuals because of factors such asage, gender, education, and the use of alcohol.C) They are objective probabilities that can be determined by deductive reasoning.D) They are objective probabilities that can be determined by subjective reasoning.Answer: CDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge7) An individual's personal estimate of the chance of loss is a(n)A) objective probability.B) objective risk.C) subjective probability.D)a prioriprobability.Answer: CDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge8) A peril isA) a moral hazard.B) the cause of a loss.C) a condition that increases the chance of a loss.D) the probability that a loss will occur.Answer: BDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge

Loading page image...

39) An earthquake is an example of a(n)A) moral hazard.B) peril.C) physical hazard.D) objective risk.Answer: BDiff: 1Question Status: Previous EditionAACSB: Reflective Thinking10) Dense fog that increases the chance of an automobile accident is an example of aA) speculative risk.B) peril.C) physical hazard.D) moral hazard.Answer: CDiff: 1Question Status: Previous EditionAACSB: Reflective Thinking11) Faking an accident to collect insurance proceeds is an example ofA) physical hazard.B) objective risk.C) moral hazard.D) attitudinal hazard.Answer: CDiff: 1Question Status: Previous EditionAACSB: Reflective Thinking12) Carelessness or indifference to a loss is an example ofA) physical hazard.B) objective probability.C) moral hazard.D) attitudinal hazard.Answer: DDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge

Loading page image...

413) Some characteristics of the judicial system and regulatory environment increase thefrequency and severity of loss. This hazard is calledA) moral hazard.B) physical hazard.C) attitudinal hazard.D) legal hazard.Answer: DDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge14) Taylor Tobacco Company is concerned that the company may be held liable in a court of lawand ordered to pay a large damage award to a smoker harmed by the company's cigarettes. Thecharacteristics of the judicial system that increase the frequency and severity of loss are knownasA) moral hazard.B) particular risk.C) speculative risk.D) legal hazard.Answer: DDiff: 1Question Status: Previous EditionAACSB: Reflective Thinking15) A name that encompasses all of the major risks faced by a business firm isA) financial risk.B) speculative risk.C) enterprise risk.D) pure risk.Answer: CDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge16) 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.A) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: DDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge

Loading page image...

517) One of the speculative financial risks considered in an enterprise risk management programis the risk of loss because of adverse changes in commodity prices, interest rates, foreignexchange rates, and the value of money. This risk is calledA) property risk.B) financial risk.C) strategic risk.D) operational risk.Answer: BDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge18) Katelyn was just named Risk Manager of ABC Company. She has decided to create a riskmanagement 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)A) financial risk management program.B) enterprise risk management program.C) fundamental risk management program.D) consequential risk management program.Answer: BDiff: 2Question Status: Previous EditionAACSB: Reflective Thinking19) A pure risk is defined as a situation in which there isA) only the possibility of loss or no loss.B) only the possibility of profit.C) a possibility of neither profit nor loss.D) a possibility of either profit or loss.Answer: ADiff: 1Question Status: Previous EditionAACSB: Application of Knowledge20) The premature death of an individual is an example of aA) pure risk.B) speculative risk.C) nondiversifiable risk.D) physical hazard.Answer: ADiff: 1Question Status: Previous EditionAACSB: Reflective Thinking

Loading page image...

621) Which of the following statements about speculative risks is true?A) They are almost always insurable by private insurers.B) They are more easily predictable than pure risks.C) They may benefit society even though a loss occurs.D) They involve only a chance of loss.Answer: CDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge22) A family's automobile that is a total loss as a result of a collision is an example of which ofthe following types of risk?I.Speculative riskII. Diversifiable riskA) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: BDiff: 1Question Status: RevisedAACSB: Reflective Thinking23) All of the following are programs to insure nondiversifiable risks EXCEPTA) federal flood insurance.B) auto physical damage insurance.C) Social Security.D) unemployment insurance.Answer: BDiff: 1Question Status: RevisedAACSB: Application of Knowledge24) All of the following are examples of personal risks EXCEPTA) poor health.B) unemployment.C) premature death.D) loss of business income.Answer: DDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge

Loading page image...

725) Which of the following is a reason why premature death may result in economic insecurity?I.Additional expenses associated with death may be incurred.II. The income of the deceased person's family may be inadequate to meet its basic needs.A) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: CDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge26) Which of the following is (are) often consequences of long-term disability?I.Continuing medical expensesII. Loss or reduction of employee benefitsA) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: CDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge27) Which of the following is an example of consequential (indirect) loss?A) the theft of a person's jewelryB) the destruction of a firm's manufacturing plant by an earthquakeC) the cost of renting a substitute vehicle while a collision-damaged car is being repairedD) the vandalism of a person's automobileAnswer: CDiff: 1Question Status: Previous EditionAACSB: Reflective Thinking28) The extra expense incurred by a business to stay in operation following a fire is an exampleof a(n)A) fundamental risk.B) speculative risk.C) direct loss.D) indirect loss.Answer: DDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge

Loading page image...

829) Which of the following statements about liability risks is (are) true?I.Future income and assets can be attached to pay judgments if inadequate insurance is carried.II. There is an upper limit on the amount of loss.A) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: ADiff: 1Question Status: Previous EditionAACSB: Application of Knowledge30) All of the following are burdens to society because of the presence of risk EXCEPTA) The size of an emergency fund must be increased.B) Risk provides an incentive for people to engage in risk control.C) Society is deprived of certain goods and services.D) Mental fear and worry are present.Answer: BDiff: 1Question Status: RevisedAACSB: Application of Knowledge31) Loss control includes which of the following?I.Loss reductionII. Loss preventionA) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: CDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge32) Following good health habits can be categorized asA) loss prevention.B) risk retention.C) noninsurance transfer.D) personal insurance.Answer: ADiff: 1Question Status: Previous EditionAACSB: Reflective Thinking

Loading page image...

933) From the insured's perspective, the use of deductibles in insurance contracts is an example ofA) risk transfer.B) risk control.C) risk avoidance.D) risk retention.Answer: DDiff: 1Question Status: Previous EditionAACSB: Reflective Thinking34) The use of fire-resistive materials when constructing a building is an example ofA) risk transfer.B) risk control.C) risk avoidance.D) risk retention.Answer: BDiff: 1Question Status: Previous EditionAACSB: Reflective Thinking35) All of the following statements about risk retention are true EXCEPTA) It may be used intentionally if commercial insurance is unavailable.B) It may be used passively because of ignorance.C) Its use is most appropriate for low-frequency, high-severity types of risks.D) Its use results in cost savings if losses are less than the cost of insurance.Answer: CDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge36) Which of the following is an example of a noninsurance risk transfer?A) not engaging in dangerous activitiesB) entering into a hold-harmless agreementC) installing smoke detectors in your homeD) using nonflammable building material when constructing a houseAnswer: BDiff: 1Question Status: Previous EditionAACSB: Reflective Thinking

Loading page image...

1037) Curt borrowed money from a bank to purchase a fishing boat. He purchased propertyinsurance on the boat. Curt had difficulty making loan payments because he did not catch manyfish, and fish prices were low. Curt intentionally sunk the boat, collected from his insurer, andpaid off the loan balance. This scenario illustrates the problem ofA) adverse selection.B) moral hazard.C) nondiversifiable risk.D) attitudinal hazard.Answer: BDiff: 2Question Status: Previous EditionAACSB: Reflective Thinking38) Jenna opened a successful restaurant. One night, after the restaurant had closed, a fire startedwhen the electrical system malfunctioned. In addition to the physical damage to the restaurant,Jenna lost profits that could have been earned while the restaurant was closed for repairs. Thelost profits are an example ofA) direct loss.B) nondiversifiable risk.C) speculative risk.D) indirect loss.Answer: DDiff: 1Question Status: Previous EditionAACSB: Reflective Thinking39) Brad started a pest control business. To protect his personal assets against liability arising outof the business, Brad incorporated the business. Brad's use of the corporate form of organizationto shield against personal liability claims illustratesA) fundamental risk.B) noninsurance transfer.C) risk retention.D) objective risk.Answer: BDiff: 2Question Status: Previous EditionAACSB: Reflective Thinking

Loading page image...

1140) ABC Insurance Company plans to sell homeowners insurance in five Western states. ABCexpects that 8 homeowners out of every 100, on average, will report claims each year. Thevariation between the rate of loss that ABC expects to occur and the rate of loss that actuallyoccurs is calledA) objective probability.B) subjective probability.C) objective risk.D) subjective risk.Answer: CDiff: 2Question Status: Previous EditionAACSB: Reflective Thinking41) Williams Company installed smoke detectors, a sprinkler system, and fire extinguishers in itsnew manufacturing facility. These devices are all examples ofA) risk control.B) noninsurance transfer.C) risk avoidance.D) risk retention.Answer: ADiff: 2Question Status: Previous EditionAACSB: Reflective Thinking42) Which of the following statements about hedging is (are) true?I.Hedging is a form of risk transfer.II. Hedging is used to address the risk of unfavorable price fluctuations.A) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: CDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge43) Cathy's car hit a patch of ice on the road. The car skidded off the road and hit a tree. Thepresence of ice on the road is best described as a(n)A) peril.B) subjective risk.C) physical hazard.D) indirect loss.Answer: CDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge

Loading page image...

1244) Jim and Paula Franklin started a dry cleaning business. The business may be successful or itmay fail. The type of risk that is present when either a profit or loss could occur is calledA) pure risk.B) subjective risk.C) nondiversifiable risk.D) speculative risk.Answer: DDiff: 1Question Status: Previous EditionAACSB: Reflective Thinking45) Ben is concerned that if he injures someone or damages someone's property he could be heldlegally responsible and required to pay damages. This type of risk is called aA) speculative risk.B) liability risk.C) nondiversifiable risk.D) property risk.Answer: BDiff: 1Question Status: Previous EditionAACSB: Reflective Thinking46) MLX Drug Company would like to market a new hypertension drug. While the Food andDrug Administration (FDA) was testing the drug, it discovered that the drug produced a harmfulside effect. When MLX learned of the FDA's test result, MLX abandoned its plan to produce anddistribute the drug. MLX's reaction illustratesA) risk avoidance.B) hedging.C) risk transfer.D) risk retention.Answer: ADiff: 1Question Status: Previous EditionAACSB: Reflective Thinking47) ABC Insurance Company sells auto insurance in one state. Recently, the state legislaturepassed a law that limits the use of an individual's credit history by insurers when selectingapplicants to insure. This change in law will increase the possibility of unprofitable results forABC. This type of hazard is an example ofA) physical hazard.B) legal hazard.C) moral hazard.D) attitudinal hazard.Answer: BDiff: 2Question Status: Previous EditionAACSB: Reflective Thinking

Loading page image...

1348) All of the following are characteristics of the liability risk that most people face EXCEPTA) a lien may be placed on your income and assets to satisfy a legal judgment.B) substantial legal expenses may be incurred defending the claim.C) there is no upper limit on the amount of the loss.D) owning liability insurance eliminates the possibility of being held legally liable.Answer: DDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge49) Which of the following statements about chance of loss and risk is (are) true?I.If the chance of loss is identical for two groups, the objective risk must be the same.II. Two individuals may perceive differently the risk inherent in a given activity.A) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: BDiff: 2Question Status: Previous EditionAACSB: Application of Knowledge50) A risk that affects only individuals or small groups and not the entire economy is called aA) diversifiable risk.B) pure risk.C) speculative risk.D) nondiversifiable risk.Answer: ADiff: 1Question Status: Previous EditionAACSB: Application of Knowledge51) Which of the following is an example of a commercial risk?A) the risk of insufficient retirement incomeB) the loss of business incomeC) the risk of premature deathD) the risk of being unemployedAnswer: BDiff: 1Question Status: Previous EditionAACSB: Reflective Thinking

Loading page image...

1452) A special form of planned retention by which part or all of a give loss exposure is retained bythe firm is calledA) hedging.B) self-insurance.C) passive retention.D) noninsurance transfer.Answer: BDiff: 1Question Status: Previous EditionAACSB: Application of Knowledge53) The production facility for ABC Manufacturing is located in a flood plain. Although the riskof flood is low, ABC's risk manager is concerned that a flood could damage the plant andequipment. He received bids on flood insurance from two insurance agents, but decided the costof coverage was too high relative to the risk. So he did not purchase flood insurance. Which riskmanagement technique is ABC using with respect to the risk of flood?A) active retentionB) noninsurance transferC) passive retentionD) avoidanceAnswer: ADiff: 2Question Status: Previous EditionAACSB: Reflective Thinking54) A student who has skipped many classes and not studied the course material was surprised tolearn there was a test when he showed-up for class. The student's mental uncertainty aboutwhether or not he will pass the test is calledA) objective risk.B) objective probability.C) subjective probability.D) subjective risk.Answer: DDiff: 2Question Status: Previous EditionAACSB: Reflective Thinking55) Rapid inflation, cyclical unemployment, war, hurricanes, and floods are all examples ofA) diversifiable risks.B) physical hazards.C) nondiversifiable risks.D) speculative risks.Answer: CDiff: 1Question Status: Previous EditionAACSB: Reflective Thinking

Loading page image...

1556) Five years ago, Shannon decided to start investing monthly in the common stock of ABCTelecom Company. Her financial well-being will be harmed if the price of ABC Telecom stockdrops significantly. The risk of investment loss can be reduced if she invests in other companiesand other types of financial assets. The risk Shannon faces with regard to her investments is a(n)A) enterprise risk.B) diversifiable risk.C) pure risk.D) nondiversifiable risk.Answer: BDiff: 2Question Status: Previous EditionAACSB: Reflective Thinking57) Frazier Electric keeps a paper copy of business records at the company's headquarters. Thecompany also has two back-up copies of business records stored in electronic files. Theelectronic files are kept in the event the paper records are damaged or destroyed. The back-upfiles illustrate which of the following risk control techniques?A) loss preventionB) loss reductionC) diversificationD) duplicationAnswer: DDiff: 2Question Status: Previous EditionAACSB: Reflective Thinking58) Rather than storing all of its finished goods in a single location, Davis Company divides thefinished goods between two warehouses. This simple risk control technique which is designed tolimit losses should a warehouse fire occur is calledA) duplication.B) risk transfer.C) separation.D) loss prevention.Answer: CDiff: 2Question Status: Previous EditionAACSB: Reflective Thinking

Preview Mode

This document has 433 pages. Sign in to access the full document!

Report

Study Now!

Document Details

Related Documents

Texas Life and Health Insurance Exam 150 Questions

Understanding Obligation and Deobligation in Resou

Budgeting for Life After High School

Ch 4 les 1

Understanding Credit Reports Analyzing John's Fina

CEO pay at John Deere and Caterpillar

Efficiency Test in US Stock Market

Financial Research Report

Financial Planning and Budget Analysis

WACC Project Verizon Communication Inc

Company

Explore

Study Tools