FIN 341 FINAL EXAM REVIEW QUESTIONS
If the risk associated with the expected cash flows of a business increases and this
variability is not offset by insurance contracts, hedging arrangements or other
contractual risk transfers, the result will likely be:
a. an increased stock price
b. a reduced stock price
c. bankruptcy
d. increased diversification - Answers -b. reduced stock price
The formation of risk pools by insures is the same, in principle, as:
a. reducing expected losses through the use of safety equipment
b. creating a well-diversified portfolio of stock shares
c. using the futures markets to hedge against fluctuations in the exchange of a particular
foreign currency
d. agreeing to an assessment premium - Answers -b. creating a well-diversified
portfolio of stock shares
The main benefits of decreasing the probability of insolvency are...
a. protect against loss of franchise value and lower underwriting risk
b. creation of more paid-in capital and achieve higher premium volume
c. achieve higher premium volume and protect against loss of franchise value
d. achieve a higher premium volume and lower underwriting risks - Answers -c. achieve
higher premium volume and protect against loss of franchise value
Frame blindness is a major decision trap. What is frame blindness? What example from
the US Auto industry do Russo and Schoemaker provide to illustrate the powerful
negative impact that frame blindness can have? - Answers -Frame blindness occurs
when you dont have any new way of seeing things that would increase profit. In Japan,
they recognized that the time it takes to change over models in care manufacturing took
way too long. In the US it took a whole shift change. The Japanese, eliminated waste
and got it down to a 45 second transition which increased production and decreases
operating costs.
Which of the following is true about the purchase of reinsurance by insurers?
a. purchasing reinsurance increases the insurer's underwriting risk
b. reinsurance can allow an insurer to hold less capital without increasing its insolvency
risk
c. the insurer does not pay a load in their reinsurance premium since reinsurance is a
business of utmost good faith
d. under treaty reinsurance, the reinsurer individually underwrites each risk submitted
under the treaty - Answers -b. reinsurance can allow an insurer to hold less capital
without increasing its insolvency risk
If the risk associated with the expected cash flows of a business increases and this
variability is not offset by insurance contracts, hedging arrangements or other
contractual risk transfers, the result will likely be:
a. an increased stock price
b. a reduced stock price
c. bankruptcy
d. increased diversification - Answers -b. reduced stock price
The formation of risk pools by insures is the same, in principle, as:
a. reducing expected losses through the use of safety equipment
b. creating a well-diversified portfolio of stock shares
c. using the futures markets to hedge against fluctuations in the exchange of a particular
foreign currency
d. agreeing to an assessment premium - Answers -b. creating a well-diversified
portfolio of stock shares
The main benefits of decreasing the probability of insolvency are...
a. protect against loss of franchise value and lower underwriting risk
b. creation of more paid-in capital and achieve higher premium volume
c. achieve higher premium volume and protect against loss of franchise value
d. achieve a higher premium volume and lower underwriting risks - Answers -c. achieve
higher premium volume and protect against loss of franchise value
Frame blindness is a major decision trap. What is frame blindness? What example from
the US Auto industry do Russo and Schoemaker provide to illustrate the powerful
negative impact that frame blindness can have? - Answers -Frame blindness occurs
when you dont have any new way of seeing things that would increase profit. In Japan,
they recognized that the time it takes to change over models in care manufacturing took
way too long. In the US it took a whole shift change. The Japanese, eliminated waste
and got it down to a 45 second transition which increased production and decreases
operating costs.
Which of the following is true about the purchase of reinsurance by insurers?
a. purchasing reinsurance increases the insurer's underwriting risk
b. reinsurance can allow an insurer to hold less capital without increasing its insolvency
risk
c. the insurer does not pay a load in their reinsurance premium since reinsurance is a
business of utmost good faith
d. under treaty reinsurance, the reinsurer individually underwrites each risk submitted
under the treaty - Answers -b. reinsurance can allow an insurer to hold less capital
without increasing its insolvency risk
