Intro to Actuarial Science

Risk - correct answers used to describe situation where there is uncertainty about the outcomes Situations are considered risky when __________ are higher or when _______ is greater - correct answers expected losses, variability Three major types of risk BUSINESSES face - correct answers credit risk, pure risk, price risk Price risks - correct answers uncertainty over the magnitude of cash flows due to possible changes in output or input prices credit risk - correct answers risk that a firms customers which it has lent money to will fail to make promised payments pure risk - correct answers risk of loss from damage to assets, legal liability, workers injury or employee benefits Risk Management Process - correct answers 1) Identify all risk 2) evaluate potential frequency and severity of losses 3) develop and select methods for managing risk 4) implement the risk management approach 5) monitor the performance/effectiveness of selected risk management process Risk Management methods - correct answers loss financing, loss control, internal risk reduction loss financing - correct answers methods used to obtain funds to pay for or offset losses that occur loss control - correct answers actions that reduce the expected cost of losses by reducing the frequency of losses and or severity of losses internal risk reduction - correct answers diversification and investment in information Objective of risk management: - correct answers maximize firm value, minimize cost of risk cost of risk (5 major components) - correct answers 1) expected losses 2) cost of loss control 3) cost of loss financing 4) const of internal risk reduction 5) cost of residual uncertainty risk averse - correct answers when having to decide between two risky alternatives that have the same expected outcome, the risk averse person always chooses the alternative whose outcomes have less variability Expected losses may be either ________ or _______ - correct answers indirect, direct risks typically fall into 4 major categories - correct answers property loss, liability loss, loss to HR, loss from external economic factors property values can be estimated in variety of ways (4) - correct answers book value, firm-specific value, market value, replacement cost new probability distribution - correct answers identifies all possible outcomes for the random variable and the probability of outcomes probability distributions are often described by their: - correct answers expected value, standard deviation, skewness, correlation maximum probable loss - correct answers describes loss distribution (liability) value at risk - correct answers describes probability distribution for the value of a portfolio or firm (asset) Frequency of loss measures - correct answers the number of losses in a given time period Severity of losses measures - correct answers the magnitude of loss per occurence