Chapter 1: Introduction to Risk Management Questions And Answers

Pure risk - ANS a chance of loss or no loss, but no chance of gain (risk associated with possible fire loss; building will either burn or not burn; may suffer financial loss or may remain unchanged) Speculative risk - ANS a chance of loss, no loss, or gain (may be profitable or unprofitable) Price risk - ANS uncertainty over the size of cash flows resulting from possible changes in the cost of raw materials and other inputs, as well as cost related changes in the market for completed products and other outputs Credit risk - ANS the risk that customers or other creditors will fail to make promised payments as they come due Subjective risk - ANS the perceived amount of risk based on an individual's or organization's opinion Objective risk - ANS the measurable variation in uncertain outcomes based on facts and data Diversifiable risk - ANS a risk that affects only some individuals, businesses, or small groups Nondiversifiable risk - ANS a risk that affects a large segment of society at the same time (unemployment, inflation, natural disasters) Systemic risk - ANS the potential for a major disruption in the function of an entire market or financial system; generally nondiversifiable Static risk - ANS risk that is always present for an organization (potential loss from natural disasters, fire theft, employee injury); different types of organizations will have their own static risks in addition to those that are common to all organizations Dynamic risk - ANS results from economic change and emerging risks Hazard - ANS a condition that increases the frequency or severity of a loss Moral hazard - ANS a condition that increases the likelihood that a person will intentionally cause or exaggerate a loss Morale hazard - ANS a condition of carelessness or indifference that increases the frequency or severity of a loss Frequency - ANS number of losses Severity - ANS the size of a loss Physical hazard - ANS a condition of property, persons, or operations that tends to increase the frequency or severity of a loss Legal hazard - ANS a condition of the legal environment that increases loss frequency or severity