FIN 341 LIEBENBERG TEST 1 STUDY GUIDE
Traditional Risk - Answers -uncertainty concerning the occurrence of a loss; also used
to identify the property or life that is being considered for insurance
which is risker and why?
- Falling off Ifle tower
- falling out of a safari tree house in Africa - Answers -falling out of a safari tree house
in Africa is riskier because there are numerous outcomes that could possibly happen
and much more uncertainty of what the loss could be. Falling off the Ifle tower only
would have one outcome, death.
Loss Exposure - Answers -any Situation or circumstance in which a loss is possible,
regardless of whether a loss occurs
- Examples:
- A plant that may be damaged by an Earthquake
- A computer network that may be hacked
- An automobile that may be damaged in a collision
objective risk - Answers -the relative variation of actual loss from expected loss
Subjective (perceived) risk - Answers -uncertainty based on a person's condition or
state of mind
Difference between Objective Risk and Chance of Loss? - Answers -- Objective risk is
the difference in the amount of times (variation) that an actual loss happens vs the
amount of times we expected the loss to occur
- Chance of loss is the probability that the event which causes a loss will occur.
(the chance of loss may be identical for two groups but objective risk may be quite
different)
chance of loss - Answers -the probability that an event that causes a loss will occur
peril - Answers -the cause of the loss
(ex. fire, flood, theft)
hazard - Answers -a condition that increases the chance of a loss
(or the environment that might increase the chance of a loss happening)
physical hazard - Answers -a physical condition that increases the frequency or
severity of a loss
(ex: unsafe working conditions)
moral hazard - Answers -- dishonesty or character defects in an individual that increase
the frequency or severity of a loss
,(A condition that increases the probability that a person will intentionally cause, create
or inflate a loss.)
- generally an act created out of intent
attitudinal hazard - Answers -- carelessness or indifference to a loss, which increases
the frequency or severity of a loss
(A condition of inattention or disregard that increases the frequency or size of a loss.)
- involves a perspective that demonstrates apathetic disregard for safety and a duty of
care.
- Also called "morale hazard" with an "e"
Morale Hazard Vs attitudinal Hazard - Answers -Moral hazard is generally an act
created out of intent (dishonesty)
While Attitudinal involves a perspective that demonstrates apathetic disregard for safety
and a duty of care. (carelessness)
legal hazard - Answers -characteristics of the legal system or regulatory environment
that increase the frequency or severity of loss
- rise in the chance of a loss due to legal action
pure risk - Answers -a situation in which there are only the possibilities of a loss or no
loss at all
- there is no gain no matter what happens. (ex: when earthquakes occur there is risk of
loss but no possible gain)
speculative risk - Answers -a situation in which either profit or loss is possible (ex: New
product)
- ex: airlines and fuel prices. Because airlines base there ticket prices based on what
they expect fuel prices to be. if they are lower then expected they would have a gain,
and if they are higher they would have a loss
Airlines face the risk of fuel prices changing unexpectedly. This risk is best described
as: - Answers -Speculative Risk
diversifiable risk - Answers -A risk that affects only some individuals, businesses, or
small groups which can be eliminated by diversification
- ex.) Car theft: only going to affect one person rather than a lot of people at once
fundamental risk - Answers -(nondiversifiable Risk) affects the entire economy or large
numbers of persons or groups within the economy;
- also known as a fundamental risk;
- government assistance may be necessary to insure these risk
- ex.) Hurricane
- ex.) Risk of war: would affect everyone at once and Government assistance is needed
because insurance companies can't financially aid that much at once
, enterprise risk - Answers -encompasses all major risks forced by a business firm, which
include: pure risk, speculative risk, strategic risk, operational risk, and financial risk
- this is the risk that matters most to firms because its looking at all the possible risks at
once
Enterprise Risk Management - Answers -combines into a single unified treatment
program all major risks faced by the firm
- Allows the firms to offset one risk against another (as long as all of the risks are not
perfectly correlated), thus reducing the firms overall 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 -uncertainty of loss because of adverse changes in commodity
prices, interests rates, foreign exchange rates, and the value of money
- ex.) importing companies might worry about the financial risk of foreign exchange
problems
systemic risk - Answers -- the risk of the collapsing of an entire system or an entire
market due to the failure of a single entity or group of entities that can result in the
breakdown of the entire financial system
- important with respect to large financial institutions that are too large to fail without
financially harming the US economy
- nobody ever considered systemic risk until the large Financial crisis around 2008
_________ Risk is especially important with respect to large financial institutions that
are too large to fail without financially harming the US economy - Answers -systemic
risk
_________ risk came about after the large financial crisis around 2008 - Answers -
Systemic Risk. (wasn't even a thing until the large financial crisis)
personal risk - Answers -risk that directly affect an individual or family; involve the
possibility of a loss or reduction in income, extra expenses, or depletion of financial
assets
- Examples of causes: premature death, inadequate retirement income, poor health,
unemployment
causes of personal risk - Answers -premature death
inadequate retirement income
poor health
unemployment
property risk - Answers -the possibility of losses associated with the destruction or theft
of property
Traditional Risk - Answers -uncertainty concerning the occurrence of a loss; also used
to identify the property or life that is being considered for insurance
which is risker and why?
- Falling off Ifle tower
- falling out of a safari tree house in Africa - Answers -falling out of a safari tree house
in Africa is riskier because there are numerous outcomes that could possibly happen
and much more uncertainty of what the loss could be. Falling off the Ifle tower only
would have one outcome, death.
Loss Exposure - Answers -any Situation or circumstance in which a loss is possible,
regardless of whether a loss occurs
- Examples:
- A plant that may be damaged by an Earthquake
- A computer network that may be hacked
- An automobile that may be damaged in a collision
objective risk - Answers -the relative variation of actual loss from expected loss
Subjective (perceived) risk - Answers -uncertainty based on a person's condition or
state of mind
Difference between Objective Risk and Chance of Loss? - Answers -- Objective risk is
the difference in the amount of times (variation) that an actual loss happens vs the
amount of times we expected the loss to occur
- Chance of loss is the probability that the event which causes a loss will occur.
(the chance of loss may be identical for two groups but objective risk may be quite
different)
chance of loss - Answers -the probability that an event that causes a loss will occur
peril - Answers -the cause of the loss
(ex. fire, flood, theft)
hazard - Answers -a condition that increases the chance of a loss
(or the environment that might increase the chance of a loss happening)
physical hazard - Answers -a physical condition that increases the frequency or
severity of a loss
(ex: unsafe working conditions)
moral hazard - Answers -- dishonesty or character defects in an individual that increase
the frequency or severity of a loss
,(A condition that increases the probability that a person will intentionally cause, create
or inflate a loss.)
- generally an act created out of intent
attitudinal hazard - Answers -- carelessness or indifference to a loss, which increases
the frequency or severity of a loss
(A condition of inattention or disregard that increases the frequency or size of a loss.)
- involves a perspective that demonstrates apathetic disregard for safety and a duty of
care.
- Also called "morale hazard" with an "e"
Morale Hazard Vs attitudinal Hazard - Answers -Moral hazard is generally an act
created out of intent (dishonesty)
While Attitudinal involves a perspective that demonstrates apathetic disregard for safety
and a duty of care. (carelessness)
legal hazard - Answers -characteristics of the legal system or regulatory environment
that increase the frequency or severity of loss
- rise in the chance of a loss due to legal action
pure risk - Answers -a situation in which there are only the possibilities of a loss or no
loss at all
- there is no gain no matter what happens. (ex: when earthquakes occur there is risk of
loss but no possible gain)
speculative risk - Answers -a situation in which either profit or loss is possible (ex: New
product)
- ex: airlines and fuel prices. Because airlines base there ticket prices based on what
they expect fuel prices to be. if they are lower then expected they would have a gain,
and if they are higher they would have a loss
Airlines face the risk of fuel prices changing unexpectedly. This risk is best described
as: - Answers -Speculative Risk
diversifiable risk - Answers -A risk that affects only some individuals, businesses, or
small groups which can be eliminated by diversification
- ex.) Car theft: only going to affect one person rather than a lot of people at once
fundamental risk - Answers -(nondiversifiable Risk) affects the entire economy or large
numbers of persons or groups within the economy;
- also known as a fundamental risk;
- government assistance may be necessary to insure these risk
- ex.) Hurricane
- ex.) Risk of war: would affect everyone at once and Government assistance is needed
because insurance companies can't financially aid that much at once
, enterprise risk - Answers -encompasses all major risks forced by a business firm, which
include: pure risk, speculative risk, strategic risk, operational risk, and financial risk
- this is the risk that matters most to firms because its looking at all the possible risks at
once
Enterprise Risk Management - Answers -combines into a single unified treatment
program all major risks faced by the firm
- Allows the firms to offset one risk against another (as long as all of the risks are not
perfectly correlated), thus reducing the firms overall 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 -uncertainty of loss because of adverse changes in commodity
prices, interests rates, foreign exchange rates, and the value of money
- ex.) importing companies might worry about the financial risk of foreign exchange
problems
systemic risk - Answers -- the risk of the collapsing of an entire system or an entire
market due to the failure of a single entity or group of entities that can result in the
breakdown of the entire financial system
- important with respect to large financial institutions that are too large to fail without
financially harming the US economy
- nobody ever considered systemic risk until the large Financial crisis around 2008
_________ Risk is especially important with respect to large financial institutions that
are too large to fail without financially harming the US economy - Answers -systemic
risk
_________ risk came about after the large financial crisis around 2008 - Answers -
Systemic Risk. (wasn't even a thing until the large financial crisis)
personal risk - Answers -risk that directly affect an individual or family; involve the
possibility of a loss or reduction in income, extra expenses, or depletion of financial
assets
- Examples of causes: premature death, inadequate retirement income, poor health,
unemployment
causes of personal risk - Answers -premature death
inadequate retirement income
poor health
unemployment
property risk - Answers -the possibility of losses associated with the destruction or theft
of property
