RMIN 317: MIDTERM I questions and
answers graded A+
TEXTBOOK CHAPTER 1 - correct answer ✔✔
Definition of Risk: - correct answer ✔✔any situation where there is uncertainty about what
outcome will occur
Risk in a more specific sense: - correct answer ✔✔Risk is often used in a more specific sense to
indicate possible variability in outcomes around the expected value
(variation around the expected value)
Expected Value: - correct answer ✔✔The outcome that would occur on average if a person or
business were repeatedly exposed to the same type of risk.
Personal Risk: 6 categories - correct answer ✔✔o Earnings risk
o Medical expense risk
o Liability risk
o Physical asset risk
o Financial asset risk
o Longevity risk
Business Risk: - correct answer ✔✔Business risk management is broadly defined as (concerned
with possible reductions in business value from any source)
The major business risks include: - correct answer ✔✔• Hazard risk
,• Financial risk
• Operational risk
• Strategic risk
What do HAZARD RISKS pose a threat to? - correct answer ✔✔Are those that pose a threat to
life, health, property, or the environment
(also known as pure risk)
Examples of Hazard Risk: - correct answer ✔✔• Fire and property damage
• Windstorm and other natural perils
• Theft and other crime, personal injury
• Business interruption
• Disease and disability
• Liability claims
Financial Risk: - correct answer ✔✔Refers to uncertainty over magnitude of cash flows due to
possible changes in prices, asset values, exchange rates, liquidity and credit risk.
Price Risk: - correct answer ✔✔• Refers to the possible changes in output and impute prices
• Output prices refers to the risk of changes in the amount that a firm can demand for its goods
or services
• Input price risk refers to the risk of changes in the prices that a firm must pay for labor,
materials, and other inputs to its production process
Specific Types of Price Risk: (3) - correct answer ✔✔• Commodity price risk (Fluctuation in the
prices of commodities)
, • Exchange rate price risk (Fluctuations in foreign exchange rates)
• Interest rate price risk (Fluctuations in interest rates)
Credit Risk: - correct answer ✔✔It is the risk that a firm's customers and the parties to which it
has lent money will delay or fail to make promised payments.
Operational Risk: - correct answer ✔✔Encompasses the risk of direct or indirect loss resulting
from inadequate or failed internal processes, people or systems
These are risks that have traditionally been managed informally by line managers as part of
their everyday work
Strategic Risk: - correct answer ✔✔Refers to risks associated with an organization's ability to
achieve their business strategy
Examples include social, regulatory, and political trends as well as changes in customer tastes
and demographics
Competitive Risk: - correct answer ✔✔Key element of strategic risk (risk associated with
competitive advantages)
3 FEATURES OF HAZARD RISK: - correct answer ✔✔The underlying causes of losses associated
with hazard are often largely specific to a particular firm and depend on the firms actions.
(FIRM SPECIFIC)
A second feature of hazard risk is that businesses commonly reduce uncertainty and finance
losses associated with hazard risk by purchasing contracts from insurance companies that
specialize in insurance and bearing such risks.
(INSURANCE CONTRACTS)
answers graded A+
TEXTBOOK CHAPTER 1 - correct answer ✔✔
Definition of Risk: - correct answer ✔✔any situation where there is uncertainty about what
outcome will occur
Risk in a more specific sense: - correct answer ✔✔Risk is often used in a more specific sense to
indicate possible variability in outcomes around the expected value
(variation around the expected value)
Expected Value: - correct answer ✔✔The outcome that would occur on average if a person or
business were repeatedly exposed to the same type of risk.
Personal Risk: 6 categories - correct answer ✔✔o Earnings risk
o Medical expense risk
o Liability risk
o Physical asset risk
o Financial asset risk
o Longevity risk
Business Risk: - correct answer ✔✔Business risk management is broadly defined as (concerned
with possible reductions in business value from any source)
The major business risks include: - correct answer ✔✔• Hazard risk
,• Financial risk
• Operational risk
• Strategic risk
What do HAZARD RISKS pose a threat to? - correct answer ✔✔Are those that pose a threat to
life, health, property, or the environment
(also known as pure risk)
Examples of Hazard Risk: - correct answer ✔✔• Fire and property damage
• Windstorm and other natural perils
• Theft and other crime, personal injury
• Business interruption
• Disease and disability
• Liability claims
Financial Risk: - correct answer ✔✔Refers to uncertainty over magnitude of cash flows due to
possible changes in prices, asset values, exchange rates, liquidity and credit risk.
Price Risk: - correct answer ✔✔• Refers to the possible changes in output and impute prices
• Output prices refers to the risk of changes in the amount that a firm can demand for its goods
or services
• Input price risk refers to the risk of changes in the prices that a firm must pay for labor,
materials, and other inputs to its production process
Specific Types of Price Risk: (3) - correct answer ✔✔• Commodity price risk (Fluctuation in the
prices of commodities)
, • Exchange rate price risk (Fluctuations in foreign exchange rates)
• Interest rate price risk (Fluctuations in interest rates)
Credit Risk: - correct answer ✔✔It is the risk that a firm's customers and the parties to which it
has lent money will delay or fail to make promised payments.
Operational Risk: - correct answer ✔✔Encompasses the risk of direct or indirect loss resulting
from inadequate or failed internal processes, people or systems
These are risks that have traditionally been managed informally by line managers as part of
their everyday work
Strategic Risk: - correct answer ✔✔Refers to risks associated with an organization's ability to
achieve their business strategy
Examples include social, regulatory, and political trends as well as changes in customer tastes
and demographics
Competitive Risk: - correct answer ✔✔Key element of strategic risk (risk associated with
competitive advantages)
3 FEATURES OF HAZARD RISK: - correct answer ✔✔The underlying causes of losses associated
with hazard are often largely specific to a particular firm and depend on the firms actions.
(FIRM SPECIFIC)
A second feature of hazard risk is that businesses commonly reduce uncertainty and finance
losses associated with hazard risk by purchasing contracts from insurance companies that
specialize in insurance and bearing such risks.
(INSURANCE CONTRACTS)
