AIN3701 Assignment 5 Semester 2
2026: Comprehensive Questions
and Answers with Rationale
### SECTION A: RISK MANAGEMENT FUNDAMENTALS (Questions 1-10)
**Q1. Which of the following best describes pure risk?**
A) Risk that can result in gain or loss
B) Risk involving only loss or no loss
C) Speculative investment risk
D) Market fluctuation risk
**Answer: B**
*Rationale: Pure risk involves only two outcomes: loss or no loss (e.g.,
fire, accident, theft). This is the type of risk that is typically insurable.
Speculative risks (A, C, D) involve the possibility of gain or loss and are
generally not insurable .*
,---
**Q2. The main purpose of risk management is to:**
A) Eliminate all risks
B) Reduce insurance premiums only
C) Identify and control potential losses
D) Increase speculative gains
**Answer: C**
*Rationale: Risk management focuses on identifying, assessing, and
controlling risks—not eliminating them entirely. Complete elimination
is rarely possible, and the goal is to manage risk exposures effectively .*
---
**Q3. Speculative risk involves:**
A) Only loss
B) Loss or gain
C) No uncertainty
D) Guaranteed loss
,**Answer: B**
*Rationale: Speculative risk presents the possibility of either a loss or a
gain (e.g., investing in stocks, gambling). Insurance typically does not
cover speculative risks .*
---
**Q4. Moral hazard refers to:**
A) Physical risk
B) Dishonesty or behavior increasing the likelihood of loss
C) Natural disasters
D) Market risk
**Answer: B**
*Rationale: Moral hazard involves behavioral changes or dishonesty by
the insured that increases the probability of loss. This occurs when the
insured is protected from consequences by insurance .*
---
, **Q5. A physical hazard includes:**
A) The insured lying on an application
B) A defective sprinkler system in a factory
C) The insured's reckless driving habit after buying insurance
D) An arsonist setting fire
**Answer: B**
*Rationale: Physical hazards are tangible conditions of property or
person that increase risk (e.g., defective wiring, slippery floors). Options
A and C describe moral hazards; D describes a peril .*
---
**Q6. Risk avoidance means:**
A) Accepting risk
B) Eliminating exposure to risk
C) Transferring risk
D) Ignoring risk
2026: Comprehensive Questions
and Answers with Rationale
### SECTION A: RISK MANAGEMENT FUNDAMENTALS (Questions 1-10)
**Q1. Which of the following best describes pure risk?**
A) Risk that can result in gain or loss
B) Risk involving only loss or no loss
C) Speculative investment risk
D) Market fluctuation risk
**Answer: B**
*Rationale: Pure risk involves only two outcomes: loss or no loss (e.g.,
fire, accident, theft). This is the type of risk that is typically insurable.
Speculative risks (A, C, D) involve the possibility of gain or loss and are
generally not insurable .*
,---
**Q2. The main purpose of risk management is to:**
A) Eliminate all risks
B) Reduce insurance premiums only
C) Identify and control potential losses
D) Increase speculative gains
**Answer: C**
*Rationale: Risk management focuses on identifying, assessing, and
controlling risks—not eliminating them entirely. Complete elimination
is rarely possible, and the goal is to manage risk exposures effectively .*
---
**Q3. Speculative risk involves:**
A) Only loss
B) Loss or gain
C) No uncertainty
D) Guaranteed loss
,**Answer: B**
*Rationale: Speculative risk presents the possibility of either a loss or a
gain (e.g., investing in stocks, gambling). Insurance typically does not
cover speculative risks .*
---
**Q4. Moral hazard refers to:**
A) Physical risk
B) Dishonesty or behavior increasing the likelihood of loss
C) Natural disasters
D) Market risk
**Answer: B**
*Rationale: Moral hazard involves behavioral changes or dishonesty by
the insured that increases the probability of loss. This occurs when the
insured is protected from consequences by insurance .*
---
, **Q5. A physical hazard includes:**
A) The insured lying on an application
B) A defective sprinkler system in a factory
C) The insured's reckless driving habit after buying insurance
D) An arsonist setting fire
**Answer: B**
*Rationale: Physical hazards are tangible conditions of property or
person that increase risk (e.g., defective wiring, slippery floors). Options
A and C describe moral hazards; D describes a peril .*
---
**Q6. Risk avoidance means:**
A) Accepting risk
B) Eliminating exposure to risk
C) Transferring risk
D) Ignoring risk
