Corporate Risk Management Exam 2

Value Proposition for KRI's

Have ability to improve, performance, improve processes, and improve workplace environment, can provide measurable data to report risks

greater variability

In using the coefficient of variation when comparing two distributions, if both distributions have the same mean, then the distribution with the larger standard deviation will have

Which one of the following statements is true regarding the risk financing goal of maintaining an appropriate level of liquidity?

It is equal to the sum of the present values of each of the separate payments.

Which one of the following analysis methods concentrates on an organization's competitive environment?

Porter's Forces

A predictive approach to data analytics involves

Providing a method to be used repeatedly to provide information

Risk appetite is an important component of strategic risk management (SRM). Which one of the following statements is correct with respect to an organization's risk appetite

Regulatory conditions, political risks, anti trust, and other legal concerns can all lessen a company's risk appetitie

Debt to assets

total liabilities/total assets, if greater than .5, most of the company's assets are financed through debt

The main difference between decision trees and event trees

Event trees analyze consequences of accidental losses rather than decisions

Which one of the following statements is correct with respect to risk tolerance?

can have high end and low end thresholds or both

Which one of the following is an example of exploratory data analysis?

correlation matrix

working capital

current assets - current liabilities

Current Ratio

current assets divided by current liabilities

Ag Products Company (APC) signed a contract to deliver 50,000 bags of its corn chips snack food to a supermarket chain is six months. The supermarket will pay APC $2.00 per bag of chips. APC will need 5,000 bushels of corn to produce the 50,000 bags of chips. It estimates the other production and shipping costs will total $62,500. Corn was selling at $5.50 per bushel when APC entered into the contract. At the time APC entered into the agreement, what was the expected net income from this deal, assuming APC does not use hedging?

$10,000, solved by 50,000*$2 = 100,000, then 5,000*$5.5 = 27,500, then 27,5000+62,500= 90,000, then 100,000-90,000 = 10,000

Shelton Manufacturing is considering investing $400,000 in a new production line. The new equipment is expected to generate a savings of $100,000 per year for each of the next five years. Shelton's cost of capital is 7%. What is the net present value of the investment in the new production line? Disregard the effect of depreciation and taxes.

$10,020, solve through NPV with including initial payment

As part of a liability claim settlement, Nicole has been given the choice between an ordinary annuity that pays $14,200 per year for 10 years, or a single lump sum payment today. If Nicole believes that a reasonable rate of return is 6%, what is the present value of the annual annuity payments?

$104,513, pmt function in NIPVPMTFV

Hartsell Company's risk manager determined the premium for liability losses, when capped at $25,000, is $15,000. An insurer's increased limit factor table using 1.00 for $25,000 shows a factor of 1.80 for $100,000. If Hartsell Company wants to increase the limit from $25,000 to $100,000, how much additional premium will it have to pay?

$12,000 How to Solve: 1.8/1 = 1.8, 1.8 * 15000 = 27000, 27000-15000 = 12000

Assuming an interest rate of 4%, the present value of $30,000 received in three years is

$26,670, 30000/(1.04)^3

Crude Oil Company is considering an investment of $270,000 to replace the outdated clean air system at its refinery. The new equipment will generate a savings of $70,000 per year for each year of its six-year life. Crude's cost of capital is 12%. What is the present value of the cash inflows from the proposed investment, ignoring income taxes?

$287,798, THIS SAYS PV OF CASH INFLOWS, npv with NOOOOOOOO initial payment

Joe wants to have $40,000 available to make the down payment on a house three years from now and has decided to set aside part of an inheritance he just received to achieve that goal. If Joe can earn 5% interest on a bank certificate of deposit, how much of the must he set aside today in order to have $40,000 three years from now?

$34,554

The sum of all probabilities is equal to

1

5 steps of strategic management

1. Develop goals - mission and vision 2. Analyze internal and external environment - SWOT, Pestle, Porter's 5 Forces 3. Formulating strategies- is it suitable, feasible, applicable, possible 4. Implementing strategies - whole organization plays a roll 5. Evaluation - monitor progress towards goals, use balance scorecard

Carl is the risk manager of Benson Company. He obtained the following General Liability increased limit factors from Casualty Insurance Consulting Company: for a loss limit of $50,000 the increased limit factor is 1.00; for a loss limit of $100,000 the increased limit factor is 1.60; for a loss limit of $500,000 the increased limit factor is 2.10; and for a loss limit of $1,000,000 the increased limit factor is 2.40. What is the increased limit factor from $100,000 to $1,000,000?

1.5, solve by 2.4/1.6 = 1.5

while implementing strategies, there are 5 steps for department managers

1.Identify and document processes, tasks and responsibilities 2.Frequently communicate information about the plan 3.Assign specific responsibilities, tasks, authority and accountability 4.Allocate resources (money, time, training, equipment, people) 5.Make necessary adjustments to stay on track

Assuming a normal distribution, 34.13% of all outcomes are within one standard deviation above the mean. If the portion of the distribution between one and two standard deviations above the mean contains 13.59% of all outcomes, what percentage is contained in the area between the mean and two standard deviations below the mean?

47.72% (34.13+13.59)

A special purpose vehicle

A facility established for the purpose of purchasing income-producing assets from an organization, holding title to them, and then using those assets to collateralize securities that will be sold to investors.

Probability analysis is best suited for organizations that have

A substantial volume of data on past losses

Trend factor

An adjustment to loss data for a change in general economic conditions, such as inflation.

During which one of the following stages of the strategic management process would an organization use methods such as Porter's Five Forces Analysis and PESTLE Analysis?

Analyzing environments

To project the value of future accidental losses, risk managers obtain data on past losses, limit individual large losses, and then

Apply trend and development factors to the data

In capital budgeting decisions, the main noncash item affecting income taxes is

Depreciation of long term assets

How to calculate period-to-period loss development factor

Divide greater month from loss triangle from previous month

Strategic Risk

Can affect positive or negative long term performance, include any factors that could impact busienss, external factors and internal, prevent problems and exploit opportunities, goal is to determine which business decisions are worth the risk

Nancy, the general liability claims manager, is concerned about a significant rise in claim frequency in the state of NJ during the past 18 months. she cannot identify the cause of the increase and has asked James, a data analyst, to help. James decides to develop a model to analyze the dataset of NJ claims, and see if any previously unknown grouping can be identified for further analysis. Which one of the following data analysis techniques is James using?

Cluster analysis

Which one of the following statements is true if earnings at risk are $200,000 with 90% confidence?

Earnings at risk are projected to be less than 200000 10% of the time

Empirical Probabilities

Estimates whose accuracy depends on the size and representative nature of the samples being studied

KRI V. KPI

KRI is data about write-offs of accounts in most recent month, quarter, year, it revolves around historical performance KPI is an analysis of reported financial results for the comapny's 35 largest customers or general challenges throughout the industry that highlight trends signlaling future collection concerns

Debt to equity

Long Term Debt / Shareholders Equity

Liquidity ratios

Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

Loss triangle approach

One loss development method involves projecting prior year's loss data into the future using a chain-ladder approach. Under this method, age-to-age development factors are calculated and averaged, and losses from a previous year are multiplied by the appropriate average age-to-age factors to estimate ultimate losses for that year. This loss development method is called the

Difference between operational and strategic

Operational: making sure things are done right, strategic: doing the right things and making right decisions to ensure that the organization achieves its goals

Sources for developing KRI's

Past risks, employee accounts, trade publications & loss registries compiled by independent information

Which one of the following is the most intangible and abstract of the four risk quadrants?

Strategic risk

Risk appetite

The amount of risk a company is willing to accept to achieve its goals and objectives. To avoid undue risk, risk appetite must be in alignment with company strategy.

Risk Tolerance

The degree, amount, or volume of risk that an organization or individual will withstand.

Which one of the following is the goal with strategic risk?

The goal is to use information about strategic risks to make informed decisions that optimize the risk-reward ratio.

A source of a rapidly growing quantity of external data is

The internet of things

For those organizations that use the internal records of their own past losses to estimate future losses,

The law of large numbers makes such estimates more accurate the larger the organization is.

3 types of major financial risk

credit risk, market risk, price risk

Regression analysis assumes that

The variable being forecast varies predictably with another variable.

expected value

The weighted average of all of the possible outcomes of a probability distribution.

Why is it common for risk managers to obtain increased limit factors from an outside source, such as an insurance advisory group or a brokerage, rather than calculating the factors using the company's own data?

There usually is not enough company data to calculate statistically credible factors

How KRI's provide opportunities for proactive strategic management

Tracking risks in advance of them occurring, management sets up desired risk threshold prior to the events

Tania works in the fraud unit for Greatview Insurance. There is a claimant who appears to be involved in multiple cases of insurance fraud. Tania decides to use social media to obtain information that may be used to develop a profile of the claimant. Tania's use of social media is an example of which one of the following types of data?

Unstructured external

Which one of the following statements is true with regard to a manufacturing company using call options to hedge the cost of a raw material?

Using call options may actually reduce the profitability of a transaction.

Balance sheet

a "snapshot" of an organization's financial position at a given moment

Text mining

a data analysis technique that an insurer would likely use to analyze claims adjuster's notes

Which of the following statements is true regarding a generic model of securitization

The organization sells income-producing assets to an SPV in exchange for cash

Price risk

The potential for a change in revenue or cost because of an increase or a decrease in the price of a product or an input

Strategic management

The process of identifying, describing, and continually evaluating the business decisions •and strategies of an organization to facilitate better performance and/or create a competitive advantage •It's the responsibility of senior executives and the BOD

Big data includes

both structured and unstructured data

A retail store has five employees with no workers compensation losses for the last two years. Which one of the following is true regarding estimating the loss probability for the coming period?

The store has insufficient loss experience to meaningfully estimate loss probability

Which one of the following statements is true regarding the strategic management process?

The strategic management process can be applied to any type of organization, including business, not-for-profit organizations, and government entities.

Like most insurance companies, the majority of insurance company's portfolio is invested in bonds. If interest rates increase, the value of the bonds will decrease. This risk is...

interest rate risk

Market risk major categories

interest rate risk (risk that a secruity's future value will decline because of changes in interest rates), exchange rate risk (uncertainty about an investments value because of potential changes in the exchange rate between securities), and liquidity risk (uncertainty that an organization will have enough cash or liquid assets

market risk

interest rate risk, exchange rate risk, liquidity risk

Which one of the following indicates the values of the target variable on a classification tree?

leaf nodes

How to develop effective risk indicators

must be relevant, design linkages between objects & potential risks, analyze risks that the company has taken on in the past

Which one of the following is a data analysis technique that operates in a way similar to the human brain?

neural networks

Loss development factor

percentages applied to past aggregate losses for each year in order to add an amount for the possibility of both late-reported claims and a future increase in the incurred amount for reported claims are called

Which one of the following is a legal and regulatory concern in obtaining mass information from social media?

privacy

Leverage ratios

ratios that measure the extent to which a firm relies on debt financing in its capital structure

Strategic risk can be created and affected by external factors or internal factors. Which one of the following is considered an internal factor?

resource allocation

credit risk

risk that the other party to an agreement will default. Uncertainty that a party obligated to pay will fulfill their obligation, only negative potential

SWOT

strengths, weaknesses, opportunities, threats