Introduction to Risk Management - Quiz Questions ch. 1 & 2

A manufacturer that elects to discontinue a particular product due to potential liability loss exposures is practicing which one of the following risk control techniques? Choose one answer. A. Avoidance B. Loss prevention C. Loss reduction D. Separation

A. Avoidance

Which one of the following is typically a post-loss risk management goal? Choose one answer. A. Continuity of operations B. Legality C. Economy of operations D. Tolerable uncertainty

A. Continuity of operations Continuity of operations is typically a post-loss risk management goal.

Achieving any post-loss goal involves expending risk management resources, which may conflict with the pre-loss goal of Choose one answer. A. Economy of operations. B. Earnings stability. C. Social responsibility. D. Tolerable uncertainty.

A. Economy of operations. Achieving any post-loss goal involves expending risk management resources, which may conflict with the pre-loss goal of economy of operations.

Which one of the following best explains the term "residual uncertainty"? Choose one answer. A. It is the level of risk that remains after implementing risk management plans. B. It is the difference between estimated subjective risk and calculated objective risk. C. It is the amount invested in risk management in order to eliminate concern. D. It is uncertainty regarding the value of any residual salvage that would remain after a loss.

A. It is the level of risk that remains after implementing risk management plans. Residual uncertainty is the level of risk that remains after implementing risk management plans.

When it comes to providing management with the desired level of assurance, with which of the following does tolerable uncertainty conflict? Choose one answer. A. Legality B. Economy of operations C. Social responsibility D. Survival

B. Economy of operations When it comes to providing management with a desired level of assurance, the goal of tolerable uncertainty might conflict with economy of operations.

Warehousing a company's inventory at different locations in different cities is an example of which one of the following risk control techniques? Choose one answer. A. Diversification B. Duplication C. Separation D. Loss prevention

C. Separation

Which two risk control measures are directly aimed at reducing the severity of net income losses? Choose one answer. A. Avoidance and loss prevention B. Diversification and loss reduction C. Separation and duplication D. Avoidance and diversification

C. Separation and duplication

Risk management activities under the enterprise-wide risk management approach occur at the Choose one answer. A. Business unit level. B. Corporate level. C. Departmental level. D. Regional level.

B. Corporate level. Risk management activities under the enterprise-wide risk management approach occur at the corporate level.

Which one of the following risk control techniques is primarily used to reduce the frequency of losses, although it may also mitigate loss severity? Choose one answer. A. Separation B. Duplication C. Diversification D. Loss prevention

D. Loss prevention

Which one of the following is a risk financing technique? Choose one answer. A. Separation B. Diversification C. Loss prevention D. Transfer

D. Transfer Transfer is a risk financing technique.

Another term for cause of loss is Choose one answer. A. Negative outcome. B. Exposure. C. Peril. D. Hazard.

C. Peril. Another term for cause of loss is peril.

Which one of the following is an element of a loss exposure? Choose one answer. A. The verification of risk B. A cause of loss C. The probability of a loss D. The occurrence of a loss

B. A cause of loss A cause of loss is an element of a loss exposure.

After identifying and analyzing loss exposures and evaluating and selecting the appropriate risk management techniques, the next step in the risk management process is to Choose one answer. A. Monitor the results. B. Revise the risk management program. C. Implement the selected techniques. D. Decide on risk financing techniques.

C. Implement the selected techniques. After identifying and analyzing loss exposures and evaluating and selecting the appropriate risk management techniques, the next step in the risk management process is to implement the selected techniques.

The second step in the risk management process is analyzing loss exposures. Which one of the following is true regarding this step? Choose one answer. A. Loss exposures are analyzed based on loss frequency, loss severity, total dollar losses, and timing in this step. B. Loss exposures that could interfere with the achievement of the organization's goals are identified in this step. C. A weakness of loss exposure analysis is that it is useful only for those types of losses that an organization has suffered in the past. D. A major strength of loss exposure analysis is that the process is generally inexpensive.

A. Loss exposures are analyzed based on loss frequency, loss severity, total dollar losses, and timing in this step. Loss exposures are analyzed based on loss frequency, loss severity, total dollar losses, and timing in this step.

In the context of risk, the chance of being injured while driving to and from work, loading a truck at work, moving furniture at home, or falling in an icy parking lot at the mall are all examples of Choose one answer. A. Possibilities. B. Uncertainties. C. Probabilities. D. Losses.

A. Possibilities. In the context of risk, the chance of being injured while driving to and from work, loading a truck at work, moving furniture at home, or falling in an icy parking lot at the mall are all examples of possibilities.

Risk is a term that is regularly used and that is generally understood in context. As used in this discussion, which one of the following is one of the two elements within the definition of risk? A. Uncertainty of outcome B. Likelihood of injury or damage to property C. Probability of financial loss D. Opportunity for profit

A. Uncertainty of outcome Uncertainty of outcome is one of the two elements within the definition of risk as used in this discussion.

Classifying risk appropriately can help in managing risk. Which one of the following statements is correct with respect to the classifications of risk? Choose one answer. A. Risk classifications are mutually exclusive, and only one can be applied to any given risk. B. A pure risk is a chance of loss or no loss, but no chance of gain. C. Insurance deals primarily with speculative risk, rather than with pure risk. D. Usually, pure risks and speculative risks can be managed using the same techniques.

B. A pure risk is a chance of loss or no loss, but no chance of gain. A pure risk is a chance of loss or no loss, but no chance of gain.

An example of an intangible asset that an individual may possess is Choose one answer. A. An investment portfolio. B. A unique skill set. C. Money that is owed to them. D. A rental property.

B. A unique skill set. An example of an intangible asset that an individual may possess is a unique skill set.

A risk management program must be monitored and periodically revised, and that revision involves four steps. Which one of the following is one of those four steps? Choose one answer. A. Establish results-based rather than activity-based standards of acceptable performance. B. Compare actual results with the established performance standards. C. Reduce any performance standards that have not been achieved by the actual results. D. Return to the first step in the risk management process to identify new loss exposures.

B. Compare actual results with the established performance standards. One of the four steps is to compare actual results with the established performance standards.

Which one of the following risk control techniques will reduce loss severity and make losses more predictable, without increasing loss frequency? Choose one answer. A. Diversification B. Duplication C. Loss prevention D. Separation

B. Duplication

Dave owns a computer store. He stores backup media copies of confidential records off site in case there is a fire at the computer store. The risk control technique Dave is using to protect the confidential records is Choose one answer. A. Diversification. B. Duplication. C. Avoidance. D. Separation.

B. Duplication. The risk control technique used by Dave is that of duplication.

The cost of residual uncertainty can have a significant effect on an individual or organization. Which one of the following statements is correct with respect to residual uncertainty? Choose one answer. A. For organizations, the cost of residual uncertainty is limited to the effect that uncertainty has on the organization itself. B. Individuals and organizations vary greatly as to how much residual uncertainty they are willing to accept, and this benefits society and the economy. C. The cost of residual uncertainty includes the cost of any insurance policies purchased to cover losses not treated by other risk management techniques. D. The cost of residual uncertainty can be calculated by subtracting the expected cost of losses or gains from an organization's cost of risk.

B. Individuals and organizations vary greatly as to how much residual uncertainty they are willing to accept, and this benefits society and the economy. Individuals and organizations vary greatly as to how much residual uncertainty they are willing to accept, and this benefits society and the economy.

To understand risk, one needs to know the probability of an outcome or event occurring. Which one of the following statements is correct with respect to probability? Choose one answer. A. It is typically expressed verbally rather than numerically. B. It can be used to decide which activities to undertake. C. It verifies that risk is present, but does not quantify it. D. It identifies what can be lost when a negative outcome occurs.

B. It can be used to decide which activities to undertake. It can be used to decide which activities to undertake.

Which one of the following is correct with respect to a business continuity plan? Choose one answer. A. It details all of the risk control techniques that an organization has implemented in order to meet its risk management goals. B. It is designed to be used during a crisis, so it should be clear and able to be quickly read and understood. C. It should be developed after the occurrence of a significant loss and should outline how the organization will respond to similar future losses. D. It is typically a closely-guarded document, available only to an organization's senior management.

B. It is designed to be used during a crisis, so it should be clear and able to be quickly read and understood.

Tania has been unemployed for six months, and her unpaid bills are mounting. She recently damaged the front fender of her vehicle after running off the road. When seeking repairs to the vehicle, she convinced the auto body shop to include damages from previous incidents in the estimate. This would allow her to collect extra money from her insurer. From an insurance and risk management perspective, Tania's behavior is indicative of a Choose one answer. A. Legal hazard. C. Morale hazard. D. Physical hazard.

B. Moral hazard. Tania's behavior is indicative of a moral hazard.

Business continuity is designed to meet both the primary risk management program post-loss goal of continuity of operation and the Choose one answer. A. Post-loss goal of growth. B. Post-loss goal of survival. C. Pre-loss goal of economy of operations. D. Pre-loss goal of social responsibility.

B. Post-loss goal of survival.

Many laws and regulations require organizations to implement specific risk control measures. Which one of the following statements is true in this regard? Choose one answer. A. These measures are a means of implementing the risk control techniques of separation, duplication, and diversification. B. The cost of adhering to these legal requirements becomes part of the cost of risk. C. These laws and regulations are amended infrequently and do not require ongoing monitoring. D. Failure to comply with legal requirements can expose an organization to sanction, but not to liability.

B. The cost of adhering to these legal requirements becomes part of the cost of risk.

Which one of the following statements is true regarding risk management program goals? Choose one answer. A. The goal of economy of operations is that the organization should incur only moderate costs in exchange for significant benefits. B. The goal of tolerable uncertainty is to allow managers to make and implement decisions without being unduly affected by uncertainty. C. The goal of earnings stability is that the organization should strive for the highest possible level of profit in the post-loss period. D. An organization with a post-loss goal requiring a minimum level of profit tends to spend less on risk financing than an organization that does not require minimum profit.

B. The goal of tolerable uncertainty is to allow managers to make and implement decisions without being unduly affected by uncertainty. The goal of tolerable uncertainty is to allow managers to make and implement decisions without being unduly affected by uncertainty.

Argot Insurance Company ("Argot") has a written business continuity plan which was developed when Argot was formed five years ago. This plan has been periodically reviewed and updated by Argot's management. Some examples of the contents of Argot's current business continuity plan are: Listings of the roles and responsibilities of numerous Argot employees; Crisis response procedures to deal with employee life and safety issues; Procedures for minimizing damage to the Argot brand; Recommendations for dealing with crises in any way possible under the existing circumstances; and A schedule for testing the effectiveness of the business continuity plan. Which one of the following is an improvement which should be made to Argot's business continuity plan? Choose one answer. A. The listings of the roles and responsibilities of the Argot employees should focus on the Argot executives. B. There should be recommendations for dealing with crises in the most efficient and cost-effective ways. C. There should be recommendations for eliminating whatever risks are faced by Argot. D. The procedures for minimizing brand damage should be replaced by stress management programs.

B. There should be recommendations for dealing with crises in the most efficient and cost-effective ways.

Delmond Manufacturing is opening a new manufacturing facility in a building that it purchased from a competitor. Using the information below, which one of the following represents the cost of risk of opening the new facility? New building cost $60.0 million Safety system upgrades $6.0 million Insurance premiums $1.5 million Retained losses $3.0 million Risk management department budget at the site $1.0 million Choose one answer. A. $7.0 million B. $10.0 million C. $11.5 million D. $71.5 million

C. $11.5 million The cost of risk of opening the new facility is $11.5 million.

Which one of the following statements regarding monitoring the results of a risk management program is true? Choose one answer. A. A results standard focuses on the quality and quantity of the risk management activities undertaken by the organization. B. Risk management professionals generally prefer performance standards that are solely dependent on the organization's loss record. C. Activities standards are necessary to obtain a complete picture of the success or failure of a risk management program. D. When performance substantially exceeds the standard, the risk management professional knows that the standard has been appropriately set.

C. Activities standards are necessary to obtain a complete picture of the success or failure of a risk management program. Activities standards are necessary to obtain a complete picture of the success or failure of a risk management program.

Which one of the following statements is correct with respect to property loss exposures? Choose one answer. A. Relatively few of the categories of risk control techniques can be applied to property loss exposures. B. The factors used to evaluate hazards and risks to real property from the external environment differ from those used to evaluate other risks to real property. C. Commercial property loss exposures are commonly examined based on construction, occupancy, protection, and environment. D. Risk control measures to reduce one property cause of loss, such as fire, are equally effective with other causes of loss.

C. Commercial property loss exposures are commonly examined based on construction, occupancy, protection, and environment.

Organizations find it difficult to establish a benchmark against which the performance of their risk management program can be assessed because it is difficult to assign a specific value to the Choose one answer. A. Cost of implementing and administering risk management. B. Cost of losses not reimbursed by insurance. C. Cost of residual uncertainty. D. Cost of measures to prevent or reduce the size of potential losses.

C. Cost of residual uncertainty. Organizations find it difficult to establish a benchmark against which the performance of their risk management program can be assessed because it is difficult to assign a specific value to the cost of residual uncertainty.

Which one of the following risk control techniques is more commonly applied to managing business risk rather than hazard risk? Choose one answer. A. Avoidance B. Separation C. Diversification D. Duplication

C. Diversification

The risk control technique that spreads loss exposures over numerous projects, products, regions, or markets is Choose one answer. A. Separation. B. Duplication. C. Diversification. D. Loss prevention.

C. Diversification.

Greg manages a small ski resort. He notes upon reviewing the injury claims he has received that many of them occurred on the same slope. To manage this exposure, Greg widens the slope and reduces the steepness. He believes these changes will reduce the number of injuries. Which one of the following risk control techniques is Greg using? Choose one answer. A. Avoidance B. Separation C. Loss prevention D. Diversification

C. Loss prevention

In addition to implementing effective and efficient measures, complying with legal requirements, and promoting safety, risk control should aim to Choose one answer. A. Ensure that preventable losses do not adversely affect ongoing operations. B. Avoid or prevent all hazard risks to which the organization may be exposed. C. Minimize or eliminate significant business interruptions, whatever their cause. D. Transfer as much of the organization's hazard and business risks as possible to third parties.

C. Minimize or eliminate significant business interruptions, whatever their cause.

Risk management program goals are typically divided into two categories: pre-loss goals and post-loss goals. Which one of the following describes one of these categories of goals? Choose one answer. A. Pre-loss goals are risk management goals that allow the organization to prepare for future losses. B. Pre-loss goals include profitability, earnings stability, and loss prevention. C. Post-loss goals broadly describe the degree of recovery that an organization will strive to reach following a loss. D. Post-loss goals include immediate restoration of operations, tolerable uncertainty, and loss mitigation.

C. Post-loss goals broadly describe the degree of recovery that an organization will strive to reach following a loss. Post-loss goals broadly describe the degree of recovery that an organization will strive to reach following a loss.

Which one of the following is measurable and quantifies risk? Choose one answer. A. Uncertainty B. Possibility C. Probability D. Feasibility

C. Probability Probability is measurable and quantifies risk.

Traditionally, the risk management professional's role has been associated with loss exposures related to Choose one answer. A. Business risk. B. Operational risk. C. Pure risk. D. Speculative risk.

C. Pure risk. Traditionally, the risk management professional's role has been associated with loss exposures related to pure risk.

Which one of the following statements is true regarding the effects of risk management on individuals, organizations, and society in general? Choose one answer. A. Organizations tend to exhibit a greater degree of risk aversion than do individuals. B. Risk management tends to increase the deterrence effect of risk in organizations. C. Risk management makes those who own or run an organization more willing to undertake risky activities. D. The benefits that risk management efforts provide to individuals and organizations are not felt by society in general.

C. Risk management makes those who own or run an organization more willing to undertake risky activities. Risk management makes those who own or run an organization more willing to undertake risky activities.

Risk can be classified as subjective or objective. Which one of the following statements is correct with respect to these risk classifications? Choose one answer. A. Subjective risk is risk associated with individuals; objective risk is risk associated with objects or things. B. Risk managers focus on objective risk and attempt to avoid allowing subjective risk to affect their decisions. C. Subjective risk can exist even where objective risk does not. D. Individuals' subjective perception of risk in a given set of circumstances is typically much higher than the objective risk.

C. Subjective risk can exist even where objective risk does not. Subjective risk can exist even where objective risk does not.

George has received an inheritance and is deciding what to do with the money. He has limited his options to four choices: donate all the money to his favorite charity, use the entire inheritance to buy a yacht, invest the inheritance in a small rental property, or use the entire amount to purchase T-bills. Which one of the following statements is true regarding the risk involved in George's options? Choose one answer. A. Donating his inheritance to charity is a pure risk; there is no uncertainty that the money will be gone and George will have no chance of profit. B. Buying a boat is a nondiversifiable risk because George can only afford to purchase a single yacht. C. The rental property presents both pure and speculative risk; property values may increase, but the building could burn down. D. Purchasing T-bills is a pure risk because the interest rate payable is known, and the chance of loss is minimal.

C. The rental property presents both pure and speculative risk; property values may increase, but the building could burn down. The rental property presents both pure and speculative risk; property values may increase, but the building could burn down.

Which one of the following best describes effective and efficient risk control measures? Choose one answer. A. They are those measures that increase employee satisfaction while reducing the level of risk. B. They reduce risk to a level that is acceptable to the organization's management. C. They are the least expensive measures that achieve an organization's risk management goals. D. They eliminate risk without requiring the organization to make outlays of cash.

C. They are the least expensive measures that achieve an organization's risk management goals.

While designing a display window, Adam, an employee of Mellfor Clothing Store, was injured when he fell from a ladder. Adam's accident was witnessed by several customers and employees. Adam suffered a broken leg and was unable to work for several weeks. Which one of the following represents a hidden cost to the clothing store resulting from Adam's accident? Choose one answer. A. Wages paid to Adam while he is unable to work B. Medical costs paid to Adam C. Time lost by employees who witnessed the accident. D. Time lost by customers who witnessed the accident

C. Time lost by employees who witnessed the accident Time lost by employees who witnessed the accident represents a hidden cost to the clothing store resulting from Adam's accident.

Which one of the following statements is correct with respect to risk control measures for net income loss exposures? Choose one answer. A. Measures that control property, liability, or personnel loss exposures are ineffective in controlling net income loss exposures. B. Risk control measures focused on reducing the immediate effect of losses on net income will satisfy risk control needs for long-term impact. C. Two risk control measures that are directly aimed at reducing the severity of net income losses are separation and duplication. D. Diversification is not a viable risk control measure for controlling net income losses.

C. Two risk control measures that are directly aimed at reducing the severity of net income losses are separation and duplication.

Company G is a manufacturer of high profile golf equipment. The risk management professional for Company G is concerned about loss of business related to product design. Failing to respond to changing customer demand and preferences in the design of golf clubs could cost Company G significant market share. Categorized according to the quadrants of risk, this exposure to loss is classified as Choose one answer. A. A hazard risk. B. An operational risk. C. A financial risk. D. A strategic risk.

D. A strategic risk. Categorized according to the quadrants of risk, this exposure to loss is classified as a strategic risk.

A manufacturer relies on supplies of a key raw material which it obtains from a particular supplier. The manufacturer makes arrangements with a second supplier to provide the raw material if the primary supplier is unable to do so. The manufacturer is practicing which one of the following risk control techniques? Choose one answer. A. Diversification B. Recovery planning C. Separation D. Duplication

D. Duplication

Which one of the following is true regarding enterprise-wide risk management (ERM)? Choose one answer. A. ERM is an approach to risk management that focuses primarily on loss exposures associated with pure risk. B. In practice, implementation of ERM occurs at the departmental or business unit level. C. Implementation of ERM is fairly consistent among organizations, regardless of their size, nature, or complexity. D. ERM is an approach to managing all of an organization's key risks and opportunities.

D. ERM is an approach to managing all of an organization's key risks and opportunities. ERM is an approach to managing all of an organization's key risks and opportunities.

Which one of the following is the goal of enterprise-wide risk management (ERM)? Choose one answer. A. Coordinate loss reduction efforts B. Reduce risk management costs C. Decentralize control of business decisions D. Maximize the organization's value

D. Maximize the organization's value The goal of ERM is to maximize the organization's value.

Driving carelessly or failing to lock an unattended building are examples of Choose one answer. A. Moral hazard. B. Physical hazard. C. Legal hazard. D. Morale hazard.

D. Morale hazard. Driving carelessly or failing to lock an unattended building are examples of morale hazard.

Daniel has developed a business continuity plan to address the threat of the loss of utility services at his company's large manufacturing plant. The management team has reviewed his plan and agrees that the plan can be quickly read and understood and should be effective in the event of a crisis. Daniel has provided copies of the plan to all relevant parties. Which one of the following should be Daniel's next step? Choose one answer. A. Locate a backup manufacturing site B. Develop a business recovery and restoration plan C. Perform a cash flow analysis D. Provide training and periodic rehearsals of the procedures

D. Provide training and periodic rehearsals of the procedures

Sally and her husband Bill own a saddle shop that has been in Sally's family for generations. Because of the sentimental value of the shop, they have invested a great deal in loss-prevention devices and safety features to ensure the survival of the business. This tendency to over-invest in loss-prevention measures creates the risk that Choose one answer. A. Too much emphasis is being placed on maximum earnings in any one period rather than stability of earnings over time. B. Risks that should be transferred are being retained. C. The risk management techniques selected are not the best ones for the saddle shop. D. The financial value of the saddle shop is not being maximized.

D. The financial value of the saddle shop is not being maximized. This tendency to over-invest in loss-prevention measures creates the risk that the financial value of the saddle shop is not being maximized.