FIN 341 FINAL EXAM QUESTIONS & ANSWERS
risk - Answers -uncertainty concerning the occurrence of a loss
Loss Exposure - Answers -any situation or circumstance in which a loss is possible,
regardless of whether a loss occurs
objective risk - Answers -the relative variation of actual loss from expected loss
Subjective Risk - Answers -uncertainty based on a person's mental condition or state of
mind
Chance of Loss - Answers -the probability that an event will occur
peril - Answers -cause of the loss
hazard - Answers -A condition that increases the frequency or severity of a loss.
physical hazard - Answers -a physical condition that increases the frequency or
severity of loss
moral hazard - Answers -dishonesty or character defects in an individual that increase
the frequency or severity of loss
Attitudinal Hazard - Answers -carelessness or indifference to a loss, which increases
the frequency or severity of a loss
Legal Hazard - Answers -characteristics of the legal system or regulatory environment
that increase the frequency or severity of losses
pure risk - Answers -A situation in which there are only the possibilities of loss or no
loss
Speculative Risk - Answers -a situation in which either profit or loss is possible
diversifiable risk - Answers -A risk that affects only some individuals, businesses, or
small groups.
nondiversifiable risk - Answers -a risk that affects the entire economy or large numbers
of persons or groups within the economy
enterprise risk - Answers -encompasses all major risks faced by a business firm, which
include: pure risk, speculative risk, strategic risk, operational risk, and financial risk
Strategic Risk - Answers -uncertainty regarding the firm's financial goals and objectives
,Operational Risk - Answers -results from the firm's business operations
financial risk - Answers -refers to unceratinty of loss because of adverse changes in
commoditity prices, interest rates, foreign exhance rates, value of money
Enterprise Risk Management - Answers -combines into a single unified treatment
program all major risks faced by the firm
systemic risk - Answers -risk of collapse of an entire system or market due to failure of
a single entity or group of entities
Personal Risk - Answers -a risk that can result in personal losses such as health and
personal well-being
Property Risk - Answers -can lead to loss of personal or business property including
money, vehicles, and buildings
Direct Loss - Answers -a financial loss that results from the physical damage,
destruction, or theft of the property
Indirect Loss - Answers -a financial loss that results indirectly from the occurrence of a
direct physical damage or theft loss
Liability Risk - Answers -involve the possibility of being held legally liable for bodily
injury or property damage to someone else
Commercial Risk - Answers -Firm's potential loss or failure from poorly conceived or
executed business strategies, tactics, or procedures.
Loss of business income - Answers -when the firm must shut down for some time after
a physical damage loss
Cybersecurity and identity theft - Answers -by thieves breaking into a firm's computer
system
human resource exposures - Answers -job-related injuries
intangible property exposures - Answers -damage to the market reputation and public
image of the company
government exposures - Answers -violation of safety standards
3 burdens of risk on society - Answers -1. The need for larger emergency funds. (this is
not the highest and best use for these funds and therefore there is an opportunity cost
to keeping these funds on reserve where they can't benefit society)
, 2. Loss of needed goods and services (opportunity cost) due to lack of funds.
3. Fear and Worry - when the fear of potential risks begin to weigh to heavily, economic
losses occur because people don't spend money they save it.
Cost of Risk - Answers -a risk management tool that measures the costs associated
with treating the organization's loss exposures
Risk Management - Answers -a process that identifies, controls, and minimizes the
impact of threats, in an effort to reduce risk to manageable levels
Pre-Loss Objectives - Answers --Prepare for potential losses in the most economical
way
-Reduce anxiety
-Meet any legal obligations
Post-Loss Objectives - Answers --Survival of the firm
-Continue operating
-Stability of earnings
-Continued growth of the firm
-Minimize the effects that a loss will have on other persons and on society
Risk Management Process - Answers -1. Risk Identification
2. Risk Assessment
3. Risk Response Development
4. Risk Response Control
sources to identify loss exposures - Answers --Risk analysis questionnaires and
checklists
-Physical inspection
-Flowcharts
-Financial statements
-Historical loss data
loss frequency - Answers -refers to the probable number of losses that may occur
during some given time period
loss severity - Answers -refers to the probable size of the losses that may occur
maximum possible loss - Answers -the worst loss that could happen to the firm during
its lifetime
probable maximum loss - Answers -is the worst loss that is likely to happen
law of large numbers - Answers -the larger the number of individuals that are randomly
drawn from a population, the more representative the resulting group will be of the
entire population
risk - Answers -uncertainty concerning the occurrence of a loss
Loss Exposure - Answers -any situation or circumstance in which a loss is possible,
regardless of whether a loss occurs
objective risk - Answers -the relative variation of actual loss from expected loss
Subjective Risk - Answers -uncertainty based on a person's mental condition or state of
mind
Chance of Loss - Answers -the probability that an event will occur
peril - Answers -cause of the loss
hazard - Answers -A condition that increases the frequency or severity of a loss.
physical hazard - Answers -a physical condition that increases the frequency or
severity of loss
moral hazard - Answers -dishonesty or character defects in an individual that increase
the frequency or severity of loss
Attitudinal Hazard - Answers -carelessness or indifference to a loss, which increases
the frequency or severity of a loss
Legal Hazard - Answers -characteristics of the legal system or regulatory environment
that increase the frequency or severity of losses
pure risk - Answers -A situation in which there are only the possibilities of loss or no
loss
Speculative Risk - Answers -a situation in which either profit or loss is possible
diversifiable risk - Answers -A risk that affects only some individuals, businesses, or
small groups.
nondiversifiable risk - Answers -a risk that affects the entire economy or large numbers
of persons or groups within the economy
enterprise risk - Answers -encompasses all major risks faced by a business firm, which
include: pure risk, speculative risk, strategic risk, operational risk, and financial risk
Strategic Risk - Answers -uncertainty regarding the firm's financial goals and objectives
,Operational Risk - Answers -results from the firm's business operations
financial risk - Answers -refers to unceratinty of loss because of adverse changes in
commoditity prices, interest rates, foreign exhance rates, value of money
Enterprise Risk Management - Answers -combines into a single unified treatment
program all major risks faced by the firm
systemic risk - Answers -risk of collapse of an entire system or market due to failure of
a single entity or group of entities
Personal Risk - Answers -a risk that can result in personal losses such as health and
personal well-being
Property Risk - Answers -can lead to loss of personal or business property including
money, vehicles, and buildings
Direct Loss - Answers -a financial loss that results from the physical damage,
destruction, or theft of the property
Indirect Loss - Answers -a financial loss that results indirectly from the occurrence of a
direct physical damage or theft loss
Liability Risk - Answers -involve the possibility of being held legally liable for bodily
injury or property damage to someone else
Commercial Risk - Answers -Firm's potential loss or failure from poorly conceived or
executed business strategies, tactics, or procedures.
Loss of business income - Answers -when the firm must shut down for some time after
a physical damage loss
Cybersecurity and identity theft - Answers -by thieves breaking into a firm's computer
system
human resource exposures - Answers -job-related injuries
intangible property exposures - Answers -damage to the market reputation and public
image of the company
government exposures - Answers -violation of safety standards
3 burdens of risk on society - Answers -1. The need for larger emergency funds. (this is
not the highest and best use for these funds and therefore there is an opportunity cost
to keeping these funds on reserve where they can't benefit society)
, 2. Loss of needed goods and services (opportunity cost) due to lack of funds.
3. Fear and Worry - when the fear of potential risks begin to weigh to heavily, economic
losses occur because people don't spend money they save it.
Cost of Risk - Answers -a risk management tool that measures the costs associated
with treating the organization's loss exposures
Risk Management - Answers -a process that identifies, controls, and minimizes the
impact of threats, in an effort to reduce risk to manageable levels
Pre-Loss Objectives - Answers --Prepare for potential losses in the most economical
way
-Reduce anxiety
-Meet any legal obligations
Post-Loss Objectives - Answers --Survival of the firm
-Continue operating
-Stability of earnings
-Continued growth of the firm
-Minimize the effects that a loss will have on other persons and on society
Risk Management Process - Answers -1. Risk Identification
2. Risk Assessment
3. Risk Response Development
4. Risk Response Control
sources to identify loss exposures - Answers --Risk analysis questionnaires and
checklists
-Physical inspection
-Flowcharts
-Financial statements
-Historical loss data
loss frequency - Answers -refers to the probable number of losses that may occur
during some given time period
loss severity - Answers -refers to the probable size of the losses that may occur
maximum possible loss - Answers -the worst loss that could happen to the firm during
its lifetime
probable maximum loss - Answers -is the worst loss that is likely to happen
law of large numbers - Answers -the larger the number of individuals that are randomly
drawn from a population, the more representative the resulting group will be of the
entire population
