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RISK MANAGEMENT MIDTERM EXAM
QUESTIONS WITH DETAILED VERIFIED
ANSWERS
Janice mistakenly thought that Medicare covers the cost of a long-term
care in a nursing home. So she did not purchase long-term care
insurance or save in case she needed a long stay in a nursing home.
Janice's treatment of the risk of a long-term stay in a nursing home is
best described as
risk control.
unplanned retention.
risk transfer.
planned retention. Ans: unplanned retention
A name that encompasses all of the major risks faced by a business firm
is
pure risk.
financial risk.
enterprise risk.
speculative risk. Ans: enterprise risk
Curt borrowed money from a bank to purchase a fishing boat. He
purchased property insurance on the boat. Curt had difficulty making loan
payments because he did not catch many fish, and fish prices were low.
Curt intentionally sunk the boat, collected from his insurer, and paid off
the loan balance. This scenario illustrates the problem of
nondiversifiable risk.
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attitudinal hazard.
adverse selection.
moral hazard. Ans: moral hazard
The premature death of an individual is an example of a
pure risk.
nondiversifiable risk.
speculative risk.
physical hazard. Ans: pure risk
A risk that affects only individuals or small groups and not the entire
economy is called a
pure risk.
diversifiable risk.
speculative risk.
nondiversifiable risk. Ans: diversifiable risk
Five years ago, Shannon decided to start investing monthly in the
common stock of ABC Telecom Company. Her financial well-being will be
harmed if the price of ABC Telecom stock drops significantly. The risk of
investment loss can be reduced if she invests in other companies and
other types of financial assets. The risk Shannon faces with regard to her
investments is a(n)
enterprise risk.
diversifiable risk.
nondiversifiable risk.
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pure risk. Ans: diversifiable risk
Brad started a pest control business. To protect his personal assets
against liability arising out of the business, Brad incorporated the
business. Brad's use of the corporate form of organization to shield
against personal liability claims illustrates
noninsurance transfer.
fundamental risk.
objective risk
risk retention. Ans: noninsurance transfer
From the insured's perspective, the use of deductibles in insurance
contracts is an example of
risk retention.
risk control.
risk avoidance.
risk transfer. Ans: risk retention
Dense fog that increases the chance of an automobile accident is an
example of a
physical hazard.
peril.
speculative risk.
moral hazard. Ans: physical hazard
The extra expense incurred by a business to stay in operation following a
fire is an example of a(n)
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direct loss.
speculative risk.
indirect loss.
fundamental risk. Ans: indirect loss
Traditionally, risk has been defined as
uncertainty concerning the occurrence of loss.
any situation in which the probability of loss is one.
any situation in which the probability of loss is zero.
the probability of a loss occurring. Ans: uncertainty concerning the
occurrence of loss
ABC Insurance Company sells auto insurance in one state. Recently, the
state legislature passed a law that limits the use of an individual's credit
history by insurers when selecting applicants to insure. This change in
law will increase the possibility of unprofitable results for ABC. This type
of hazard is an example of
physical hazard.
moral hazard.
legal hazard.
attitudinal hazard. Ans: legal hazard
Some members of Congress are concerned that if one or two large U.S.
banks fail, it could lead to the collapse of the entire U.S. financial sector.
This risk is called
objective risk.
enterprise risk.
RISK MANAGEMENT MIDTERM EXAM
QUESTIONS WITH DETAILED VERIFIED
ANSWERS
Janice mistakenly thought that Medicare covers the cost of a long-term
care in a nursing home. So she did not purchase long-term care
insurance or save in case she needed a long stay in a nursing home.
Janice's treatment of the risk of a long-term stay in a nursing home is
best described as
risk control.
unplanned retention.
risk transfer.
planned retention. Ans: unplanned retention
A name that encompasses all of the major risks faced by a business firm
is
pure risk.
financial risk.
enterprise risk.
speculative risk. Ans: enterprise risk
Curt borrowed money from a bank to purchase a fishing boat. He
purchased property insurance on the boat. Curt had difficulty making loan
payments because he did not catch many fish, and fish prices were low.
Curt intentionally sunk the boat, collected from his insurer, and paid off
the loan balance. This scenario illustrates the problem of
nondiversifiable risk.
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attitudinal hazard.
adverse selection.
moral hazard. Ans: moral hazard
The premature death of an individual is an example of a
pure risk.
nondiversifiable risk.
speculative risk.
physical hazard. Ans: pure risk
A risk that affects only individuals or small groups and not the entire
economy is called a
pure risk.
diversifiable risk.
speculative risk.
nondiversifiable risk. Ans: diversifiable risk
Five years ago, Shannon decided to start investing monthly in the
common stock of ABC Telecom Company. Her financial well-being will be
harmed if the price of ABC Telecom stock drops significantly. The risk of
investment loss can be reduced if she invests in other companies and
other types of financial assets. The risk Shannon faces with regard to her
investments is a(n)
enterprise risk.
diversifiable risk.
nondiversifiable risk.
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pure risk. Ans: diversifiable risk
Brad started a pest control business. To protect his personal assets
against liability arising out of the business, Brad incorporated the
business. Brad's use of the corporate form of organization to shield
against personal liability claims illustrates
noninsurance transfer.
fundamental risk.
objective risk
risk retention. Ans: noninsurance transfer
From the insured's perspective, the use of deductibles in insurance
contracts is an example of
risk retention.
risk control.
risk avoidance.
risk transfer. Ans: risk retention
Dense fog that increases the chance of an automobile accident is an
example of a
physical hazard.
peril.
speculative risk.
moral hazard. Ans: physical hazard
The extra expense incurred by a business to stay in operation following a
fire is an example of a(n)
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direct loss.
speculative risk.
indirect loss.
fundamental risk. Ans: indirect loss
Traditionally, risk has been defined as
uncertainty concerning the occurrence of loss.
any situation in which the probability of loss is one.
any situation in which the probability of loss is zero.
the probability of a loss occurring. Ans: uncertainty concerning the
occurrence of loss
ABC Insurance Company sells auto insurance in one state. Recently, the
state legislature passed a law that limits the use of an individual's credit
history by insurers when selecting applicants to insure. This change in
law will increase the possibility of unprofitable results for ABC. This type
of hazard is an example of
physical hazard.
moral hazard.
legal hazard.
attitudinal hazard. Ans: legal hazard
Some members of Congress are concerned that if one or two large U.S.
banks fail, it could lead to the collapse of the entire U.S. financial sector.
This risk is called
objective risk.
enterprise risk.
