FINA 341, Exam 1, Hartwig UPDATED ACTUAL Questions And Correct Answers
Terms in this set (125)
Risk 1. Situation in which there is an expected loss
2. Situation in which there is variability around an expected result/value/loss
Uncertainty concerning the occurrence of a loss
Also used to identify the property or life that is being considered for insurance
, Insurance v gambling Insurance handles an already existing pure risk and is always socially productive
Gambling creates a new speculative risk and is not socially productive (winner's
gain comes at the expense of the loser)
3 major burdens because of risk 1. Maintain large emergency funds
2. Can discourage innovation
3. Worry and fear
Pure risk A chance of loss or no loss, but no chance of gain
Typically trying to insure against
Do not get anything for not getting an accident
Always undesirable
Neither outcome produces a gain
Speculative Risk Example: gambling
Involves the chance of gain
Price risk: risk associated with change in the price of inputs as well as the market
price for completed outputs, futures contract for the price of aluminum (car
company)
Credit risk: risk that customers and parties to whom the company has lent money
delay or fail to make promised pauments
Market risk: risk associated with change in price of financial securities (stocks and
bonds)
Interest rate risk: Change in the interest rate, Federal Funds rate
Liquidity risk: Being able to easily liquidate and investment, cannot easily liquidate
a shopping mall
Exchange rate risk: currency valuation fluctuations
Objective risk Risk where the degree of variation in uncertain outcome scan be measured
(quantified) based on facts, data and analysis
Examples: hurricane risk (insures losses, catastrophe modeling, climate science),
mortality risk
Relative variation of actual loss from expected loss
Subjective risk Perceived degree of risk is based on an individual or organization's opinion
Examples: accessing risk of flying/shark/terrorism (overestimate),
flood/smoking/health (underestimate)
Diversifiable risk Affects only some individuals or small groups, not the entire portfolio. Can
significantly be reduced through diversification.
Non diversifiable risk Highly correlated
Affects all or large proportion of individuals or groups
Cyclical unemployment, unexpected shocks
Systemic risk Has the potential to severely disrupt or lead to the collapse of an entire market,
the financial system or major segments of the economy
Chance of loss Probability that an event that causes loss will occur
Terms in this set (125)
Risk 1. Situation in which there is an expected loss
2. Situation in which there is variability around an expected result/value/loss
Uncertainty concerning the occurrence of a loss
Also used to identify the property or life that is being considered for insurance
, Insurance v gambling Insurance handles an already existing pure risk and is always socially productive
Gambling creates a new speculative risk and is not socially productive (winner's
gain comes at the expense of the loser)
3 major burdens because of risk 1. Maintain large emergency funds
2. Can discourage innovation
3. Worry and fear
Pure risk A chance of loss or no loss, but no chance of gain
Typically trying to insure against
Do not get anything for not getting an accident
Always undesirable
Neither outcome produces a gain
Speculative Risk Example: gambling
Involves the chance of gain
Price risk: risk associated with change in the price of inputs as well as the market
price for completed outputs, futures contract for the price of aluminum (car
company)
Credit risk: risk that customers and parties to whom the company has lent money
delay or fail to make promised pauments
Market risk: risk associated with change in price of financial securities (stocks and
bonds)
Interest rate risk: Change in the interest rate, Federal Funds rate
Liquidity risk: Being able to easily liquidate and investment, cannot easily liquidate
a shopping mall
Exchange rate risk: currency valuation fluctuations
Objective risk Risk where the degree of variation in uncertain outcome scan be measured
(quantified) based on facts, data and analysis
Examples: hurricane risk (insures losses, catastrophe modeling, climate science),
mortality risk
Relative variation of actual loss from expected loss
Subjective risk Perceived degree of risk is based on an individual or organization's opinion
Examples: accessing risk of flying/shark/terrorism (overestimate),
flood/smoking/health (underestimate)
Diversifiable risk Affects only some individuals or small groups, not the entire portfolio. Can
significantly be reduced through diversification.
Non diversifiable risk Highly correlated
Affects all or large proportion of individuals or groups
Cyclical unemployment, unexpected shocks
Systemic risk Has the potential to severely disrupt or lead to the collapse of an entire market,
the financial system or major segments of the economy
Chance of loss Probability that an event that causes loss will occur
