RMI 378 6-8

Local Petroleum Distributors (LPD) sells gas and diesel fuel to 72 independent gas stations and convenience stores. Receiving accurate data on the fuel needs of its customers is a critical operational concern. LPD installed sensors in the fuel storage tanks owned by each customer. At 11 PM each evening, the sensors send fuel data electronically to LPD. LPD receives the data, and a computer enters each record. The data are analyzed, and the analysis determines which retailers require a fuel shipment in the next three days. The electronic system has increased operational efficiency as shipments can be better coordinated, and retailers are no longer required to measure the fuel level and report manually. LPD's use of a computer to enter the data reported by the sensors is an example of

A. Blockchain. B. Data analytics. C. Monte Carlo simulation. D. Robotic process automation. Answer - D

Which one of the following statements is correct regarding formulating an organization's long-term strategies?

A. A long-term strategy should be an aspirational description of what an organization will accomplish in the long-term future. B. All parts of an organization play a role in formulating an organization's long-term strategies. C. Long-term strategies to improve performance and/or create a competitive advantage, are based on the organization's goals and analysis of internal and external environments. D. Formulating an organization's long-term strategy involves determining the "who," "what," and "when" responsibilities of each department. Answer - C

Sixth National Bank stores all of its financial records in an electronic data base. Sixth National customers are able to access their accounts on-line with a user identification number and a password. Last weekend, a computer hacker was able to breach the firewall of the electronic database and gain access to customer account data. This operational risk for Sixth National Bank is

A. A process risk. B. An external event risk. C. A systems risk. D. A credit risk. Answer - C

Which one of the following statements about blockchain is true?

A. Although blockchain can increase efficiency of operating systems, the tradeoff is data inaccuracy. B. Blockchain centralizes control of transaction data on a single computer server. C. While blockchain can reduce operational risks, it is easy to manipulate and hack. D. Blockchain stores a record of transactions across a network of servers. Answer - D

The basic accounting equation on which the balance sheet is structured is

A. Assets = Liabilities + Net Worth B. Liabilities = Assets + Net Worth C. Net Worth = Liabilities + Assets D. Assets = Liabilities - Net Worth Answer - A

The balance sheet provides a snapshot of an organization's financial condition

A. At the start and end of a business day. B. For at least two points in time for comparison purposes. C. At a given point in time. D. Over one 12 month period. Answer - C

On a local television program, a financial reporter stated, "There will be big news this week about Sixth National Bank's bad real estate development loans. Unless they get acquired soon, the bank will be broke." The next morning, long lines of depositors waited outside of each Sixth National Bank branch. When the branches opened, depositors began withdrawing their funds. Sixth National Bank did not have enough funds to pay all the depositors and had to close early, which only further compounded the problem. Which one of the following financial risks is Sixth National Bank facing by not having enough cash on hand to meet the immediate demand?

A. Default risk. B. Liquidity risk. C. Exchange rate risk. D. Credit risk. Answer - B

When assessing strategic risk, which one of the following represents the amount of risk an organization is willing to take on in order to achieve an anticipated result or return?

A. Economic capital B. Risk threshold C. Risk-adjusted return on capital D. Risk appetite Answer D

Risk indicators such as experience and authority levels apply to which one of the following operational risk classes?

A. External events B. Process C. Systems D. People Answer - D

Taylor owns Paoli Hardware, a mid-sized hardware store with 25 employees. Paoli Hardware has won best local hardware store 3 years in a row. Taylor would like to expand operations and has undertaken a SWOT analysis. His most dedicated customers are generally over 40 years old and engaged in small house projects, but his biggest revenue generator continues to be the sale of lumber. He would like to obtain more commercial customers and increase lumber sales. One of the major complaints Taylor hears from his customers is the difficulty finding local contractors. So, he is considering hiring a general contractor at the store who would also make house calls to assist customers. This will allow him to bill for labor and increase the sale of his products, but he is concerned it may increase his insurance claims and premiums. One of the younger store employees suggested they create a website to expand sales to on-line purchases and target electronic advertisements to commercial accounts. Taylor is not sure that he has the expertise to maintain a website and run the store. The employee claims to know a company that can maintain a website for Paoli at minimal cost. Taylor believes the website is a good idea and will increase sales of lumber. To protect Paoli from increases in the cost of lumber, Taylor is considering a forward contract with the lumber yard. Which one of Porter's Five Forces is most greatly affected by Paoli's ability to negotiate a forward contract with a lumber supplier?

A. How competitive you are with existing firms. B. The customers' bargaining power to drive prices down. C. The suppliers bargaining power to drive prices up. D. The threat of customers finding a substitute way of doing what you do. Answer - C

Jeremy purchased some long-term corporate bonds when he retired. He plans to use the periodic interest payments from the bonds to supplement his other sources of retirement income. However, some of the companies that issued the bonds that Jeremy purchased may become insolvent and unable to make periodic interest payments. This risk that Jeremy took when he invested in the corporate bonds is called

A. Interest rate risk. B. Credit risk. C. Price risk. D. Exchange-rate risk. Answer - B

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

A. Investors purchase securities from the organization that are then used as a guarantee for the purchase of income-producing assets. B. The organization sells income-producing assets to an SPV in exchange for cash. C. The Special Purpose Vehicle (SPV) uses income-producing assets from investors to fund debt from the organization. D. The SPV sells income-producing assets to the organization in exchange for securities purchased by investors. Answer - B

Taylor owns Paoli Hardware, a mid-sized hardware store with 25 employees. Paoli Hardware has won best local hardware store 3 years in a row. Taylor would like to expand operations and has undertaken a SWOT analysis. His most dedicated customers are generally over 40 years old and engaged in small house projects, but his biggest revenue generator continues to be the sale of lumber. He would like to obtain more commercial customers and increase lumber sales. One of the major complaints Taylor hears from his customers is the difficulty finding local contractors. So, he is considering hiring a general contractor at the store who would also make house calls to assist customers. This will allow him to bill for labor and increase the sale of his products, but he is concerned it may increase his insurance claims and premiums. One of the younger store employees suggested they create a website to expand sales to on-line purchases and target electronic advertisements to commercial accounts. Taylor is not sure that he has the expertise to maintain a website and run the store. The employee claims to know a company that can maintain a website for Paoli at minimal cost. Taylor believes the website is a good idea and will increase sales of lumber. To protect Paoli from increases in the cost of lumber, Taylor is considering a forward contract with the lumber yard. If Taylor completed a PESTLE analysis instead of a SWOT analysis, the PESTLE analysis would include which one of the following?

A. Lack of expertise among employees B. Introducing on-line sales C. Increase in competition D. Need for a growth initiative Answer - C

If an organization directly securitized its income-producing assets without using a special purpose vehicle (SPV) as an intermediary, investors

A. Must consider the overall credit risk of the organization. B. Would avoid investing in the organization altogether. C. Should not consider the overall credit risk of the organization. D. Should examine individual borrowers' payments to the organization. Answer - A

A major benefit of involving a special purpose vehicle (SPV) in a securitization transaction is that investors can decide whether to invest in the securities based on the

A. Number of borrowers involved and their individual risk. B. Organization's balance sheets. C. Risk presented by the income-producing assets held as collateral by the SPV. D. Overall credit risk of the organization. Answer - C

Which one of the following statements is true regarding operational risk?

A. Operational risk is best managed during the course of business by an organization's front-line managers. B. Operational risk is integrated in every activity of an organization. C. Most current methods of managing operational risk are informal. D. Financial institutions and their regulators typically define operational risk to include market risk and credit risk. Answer - B

Which one of the following commonly used categories of operational risk includes risks associated with technology and equipment?

A. People B. External events C. Process D. Systems Answer - D

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

A. Price risk. B. Liquidity risk. C. Credit risk. D. Interest rate risk. Answer - D

One financial risk for an insurer is that the insured will not pay all of the premiums when the premiums are due. This type of risk is called

A. Price risk. B. Underwriting risk. C. Interest rate risk. D. Credit risk. Answer - D

A construction company based in the U.S. has building contracts in five different foreign nations. The construction company agreed to accept payment for its work in each country's currency. The risk of loss of value when these foreign payments are converted to U.S. dollars is called

A. Pure risk. B. Credit risk. C. Liquidity risk. D. Exchange-rate risk. Answer - D

Which one of the following statements is true concerning robotic process automation (RPA)?

A. RPA is more focused on the range of tasks that can be performed by a robot rather than the process of completing a task. B. When RPA is employed, it always involves the use of robots. C. Although RPA can help control some organizational risks, use of RPA can create other risks. D. RPA cannot be used as part of business process management. Answer - C

Chuck is Vice President of Claims for Insurance Company. The company has 37 adjusters in the field, and needs to hire four new adjusters. Chuck is curious about the relationship between prior experience of the adjuster and policy owner complaints. He collected data on the number of complaints for each adjuster on staff over time. Then he used a statistical technique to analyze the relationship between adjuster experience and complaints, and the trend of the relationship over time. The statistical analysis confirmed that that there were significantly fewer complaints with more experienced adjusters, and that the relationship grew stronger with more years of experience. The technique Chuck used to relate indicators to outcomes is called

A. Regression analysis. B. Analysis of variance. C. SWOT analysis. D. Central tendency analysis. Answer - A

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?

A. Regulatory conditions, political risks, and anti-trust or other legal concerns can reduce an organization's risk appetite. B. An organization's risk appetite is typically independent of its capital and other assets, including its human resources. C. Economic forces, market forces, and competition generally have little effect on an organizations' risk appetite. D. Because risk appetite is based on the attitudes of executives and shareholders, it is usually static and does not vary over time. Answer - A

Widget Manufacturing board of directors recently adopted a zero-risk tolerance for work place accidents. Initially the chief risk officer thought this was a great idea, however, he has found it very hard to implement. One reason that a zero-risk tolerance policy is hard to implement is because zero-risk tolerance

A. Results in higher capital expenditures and significantly lower returns on investment. B. Requires supervisors to constantly monitor and often micro-manage their direct reports. C. Results in higher levels of customer defections due to the high costs of implementation. D. Will typically result in risk-based decisions that are too rigid and counter-productive. Answer - D

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

A. Risk tolerance is stated in both quantitative and qualitative terms. B. An organization's risk tolerance is typically unrelated to its risk appetite. C. A zero-risk tolerance level will typically result in the best risk-based decisions. D. Risk tolerance levels can have high-end thresholds, low-end thresholds, or both. Answer - D

Three HillsLaw is a legal firm specializing in multiple-plaintiff cases. One current case involves alleged birth defects caused by exposure to polluted groundwater. There are currently 78 plaintiffs represented in the pending legal action. Up-to-date records on the condition of each child is a critical operational concern. Three HillsLaw turned to a secured digital ledger system in which independent third parties (nurses, physicians, and parents) can update the status of individual children, and the record for the entire group is automatically updated. The latest update showed seven children have died, 14 have a terminal diagnosis, 27 have permanent disabilities, and 30 cases are listed as "developing" (awaiting definitive diagnosis). The secured distributed ledger system used by Three HillsLaw is called

A. Robotic process automation. B. Cryptocurrency. C. Telematics. D. Blockchain. Answer - D

Taylor owns Paoli Hardware, a mid-sized hardware store with 25 employees. Paoli Hardware has won best local hardware store 3 years in a row. Taylor would like to expand operations and has undertaken a SWOT analysis. His most dedicated customers are generally over 40 years old and engaged in small house projects, but his biggest revenue generator continues to be the sale of lumber. He would like to obtain more commercial customers and increase lumber sales. One of the major complaints Taylor hears from his customers is the difficulty finding local contractors. So, he is considering hiring a general contractor at the store who would also make house calls to assist customers. This will allow him to bill for labor and increase the sale of his products, but he is concerned it may increase his insurance claims and premiums. One of the younger store employees suggested they create a website to expand sales to on-line purchases and target electronic advertisements to commercial accounts. Taylor is not sure that he has the expertise to maintain a website and run the store. The employee claims to know a company that can maintain a website for Paoli at minimal cost. Taylor believes the website is a good idea and will increase sales of lumber. To protect Paoli from increases in the cost of lumber, Taylor is considering a forward contract with the lumber yard. Which one of the following could Taylor's SWOT analysis consider an opportunity or a threat, or both an opportunity and a threat?

A. Shortage of personnel to explore new projects B. Reputation C. Technological advancements D. Lack of Expertise Answer - C

Insurance Company monitors key indicators of underwriting effectiveness. Some indicators they monitor include: percentage of business quoted that was written, application processing time, premium volume handled by underwriters, skill level of underwriters, and benchmarking between different underwriting offices. The indicators of underwriting performance Insurance Company uses are called

A. System indicators. B. Process indicators. C. Control indicators. D. Exposure indicators. Answer - C

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

A. The strategic management process aligns all of an organization's strategies and activities to enable it to meet its short-term goals. B. The strategic management process is the responsibility of an organization's board of directors. C. The strategic management process can be applied to any type of organization, including business, not-for-profit organizations, and government entities. D. The strategic management process focuses on the internal environment of the organization. Answer - C

The board of directors of Insurance Company wants assurance that the company's recently-instituted "commitment to risk management" has been communicated to and accepted by ALL company employees. Which one of the following would be the best method to determine if employees had been informed of the commitment to risk management and had accepted it?

A. Use a measure such as sales per employee or net income per employee to track performance. B. Ask the internal audit department to administer a risk management questionnaire to employees. C. Ask senior management to prepare a report on the subject. D. Check employee absenteeism before and after the policy was instituted. Answer - B

Clark's Electronics is considering launching new technology for the medical industry. Before investing major resources in the project, the company decided to perform a SWOT analysis. The fact that there are new medical industry regulations pending would fall under which one of the following quadrants of a SWOT analysis?

A. Weaknesses B. Opportunities C. Threats D. Strengths Answer - C