AIAF 1: Intro to Risk Management Questions With Correct Answers!!

Who considered risk as a choice - Answer-Bernstein; "Risk is uncertainty about outcomes that can be either negative or positive" Definitions of Risk - Answer-ISO: effect of uncertainty on objects COSO: possibility that an event will occur and adversely affect achievement of outcomes RIMS: uncertain future outcome can be pos/neg RMI: Probable freq and probable magnitude of future loss CFA: Exposure to a proposition of which one is uncertain Definitions of Risk Management - Answer-ISO: Coordinated activities to direct and control an organization with regard to risk COSO: Identification, assessment, and response to risk RIMS: Busn discipline that drives deliberation regarding uncertainties and untapped opps that affect strategy Positive vs. negative risk examples - Answer-Positive: exceeding sales objectives, attracting investor interest Negative: traditional hazard risks (fire and wind) and legal risks (product liability), operational risks T or F: Recent risk mgmt theory includes a holistic approach to risk mgmt - Answer-true baby High-level categories of risk - Answer-1. Hazard (pure) risks 2. Operational Risks 3. Financial risks 4. Strategic risks *subcategories: project, financial reporting, and process risks T or F: Sarbanes Oxley had requirements surrounding risk mgmt controls - Answer-true; public companies had to disclose and discuss risk mgmt controlsWhat is historically the most widely practiced type of risk mgmt? - Answer--Risk mgmt of accidental losses Example of technology to manage risks that actually ended up increasing risk - Answer--Derivatives to manage exchange rate or supply chain risks World Economic Forum's four critical connectors in regard to risk interconnection: - Answer-1. Severe income disparity (economic) 2. Major systematic financial failure (economic) 3. Unforeseen negative consequences of regulation (economic) 4. Extreme volatility in energy and agri prices (economic) Which risk management techniques benefit the overall economy? - Answer--Risk mitigation and risk transfer -Ex: Insurance can prevent a busn from failure after a Cat and the unemployment that it would cause Systemic Risk - Answer--The potential for a major disruption in the function of an entire market or financial system. Benefits of Risk Mgmt for an Organization - Answer-1. Reduce cost of hazard risk 2. Reduce deterrence effects of hazard risks 3. Reduce downside risk 4. Manage the downside of risk 5. Intelligent risk taking 6. Max profitability 7. Holistic risk mgmt 8. Legal/reg requirements An organization's **cost of risk** is the total of: - Answer--Accidental losses not reimbursed by insurance -Ins premiums or expenses incurred for non-ins indemnity -Administering risk mgmt activitiesCost of Risk - Answer--The total cost incurred by an organization because of the possibility of accidental loss. Risk Mgmt benefits: Reducing deterrence effects of hazard risks - Answer--Risk mgmt reduces this by making losses less frequent, severe and more foreseeable -Resulting reduction in uncertainty benefits an org in the following ways: --Reduces mgmt's fears about potential losses --Increases profit potential w/ higher participation in investment/production activities --Makes the org a safer investment; more attractive to investors How can an organization reduce downside risks? - Answer--Stop-loss limits: have triggers in place whenever operations hit a predetermined stop-loss limit -Hedging