Risk Management
Common pitfalls in decision making include: Ignoring Implicit Costs Failing to Ignore Sunk Costs Miscalculating the reservation price I only II only III only I and III I, II, and III
1 and 2 only
A vehicle is an example of which of the following?Durable good Service Nondurable good None of the above
A
Anti-lock brakes are an example of: Risk (loss) control Risk (loss) financing Internal risk reduction Retention Hedging
A
Callie is a supervisor at a firm, and wants to spend $1.2 million on a new building. The owners are furious, they don't believe they need a new building. Which term best describes the situation? Principal-Agent problem Abusive Management Superiority Complex Adverse Selection Moral Hazard
A
Casey is faced with the following decision. She can either win $25 for certain (probability = 1) or she can participate in a bet where the expected outcome is $50 with a probability of 0.5 or $10 with a probability of 0.5. Casey decides that she's indifferent between the two options. What category of risk aversion best describes Casey? Risk-averse Risk-neutral Risk-seeking None of the above
A
In layman's terms, what does it mean when we say "the utility is increasing at a decreasing rate?" When I have more wealth, each additional dollar means less to me When I have less wealth, each additional dollar means less to me I am indifferent between less wealth and more wealth None of the above
A
Possible illness and premature death are examples of which of the following sources of risk: Personal Property Liability Financial
A
Reducing the level of risky activity is a method of: Risk (loss) control Risk (loss) financing Internal risk reduction Retention Hedging
A
The preferred approach to risk identification is: Combination approach Questionnaires Checklists Procedure guides Contract analysis
A
True or False: According to the reading "Innovation Risk: How to Make Smarter Decisions", a major source of risk is the imbalance that can occur between innovations in products and services and the slower changes to infrastructure. True False
A
True or False: According to the reading "Innovation Risk: How to Make Smarter Decisions", innovation changes the trade-off between risk and reward. True False
A
True or False: Negative externalities occur when important costs of benefits accrue to people other than the decision maker. True False
A
True or False: Normative Questions ask what "should" be. True False
A
What effect do political incentives have on the discount rate used to make governmental decisions? A. Increase the discount rate B. Decrease the discount rate C. The discount rate is unaffected D. There is no way of knowing the effect on the discount rate
A
What's the typical amount of income saved by U.S. households? 3% 5% 12% 16.25%
A
Which decision rule works best with multistage decisions: The rollback technique Maximin principle Maximax principle Maximum likelihood principle Expectation principle
A
Which of the following best describes a firm that "may be organized horizontally, with several plants performing much of the same function?" Multiplant firms Horizontally integrated firms Vertically integrated firms Conglomerates
A
Which of the following categories of risk represent the risks that are NOT inherent in an organization's operations: secondary static fundamental core
A
Which of the following is a burden of risk on society Need for larger emergency funds Additional goods and services Risk financing Risk control
A
Which of the following is a rule of risk management Don't risk more than you can afford to lose Consider marginal benefits Maximize reward whenever possible Minimize risk whenever possible All of the above are rules of risk management
A
Which of the following is true regarding the risk/reward tradeoff for individuals and for organizations? Only individuals use expected utility Only organizations use expected utility Both individuals and organizations use expected utility None of the above
A
Which of the following represents the "worst case scenario": Maximum possible loss Mean Standard Deviation Probable maximum loss Law of Large Losses
A
John Stuart Mill was a child prodigy and protégé of ______? James Mill Bentham Ed Diener None of the above
A or B
According to the reading "Innovation Risk: How to Make Smarter Decisions", the five rules of thumb to minimize risk do NOT include: Recognize that you need a model Ensure that your model is complete Understand the use and user Check the infrastructure Expect the unexpected
B
Cole fails to be careful with his cell phone because he purchased the insurance coverage on it. Cole's behavior is an example of: Physical hazard Moral hazard Adverse Selection Genetic Predisposition
B
Risk (loss) Reduction is aimed at: frequency severity Both frequency and severity Retention Hedging
B
The immediate cause of a loss is: Exposure Peril Hazard Adverse Selection
B
The marginal cost of adding a new server to "A Nyce Place to Work" is $3,000. The marginal benefit of the first server is $4,000, but that number drops $500 for each additional server. How many servers should "A Nyce Place to Work" buy? 1 3 5 6 10
B
The reading "A Scientific View of Risk" added what component to the definition of risk: Adverse effects A time element A possibility of death Risk reduction Value of a human life
B
True or False: A regret table represents the amount of profit earned by adopting the optimal course of action. True False
B
True or False: According to the reading "Innovation Risk: How to Make Smarter Decisions", the only proper thing to do with an incomplete model is to stop using it. True False
B
True or False: The certainty equivalent is the minimum benefit that must be offered to get an individual to undertake an activity. True False
B
What is the definition of risk? Loss Uncertainty regarding loss Possibility of loss or gain All of the above None of the above
B
Which decision rule appeals to the most pessimistic decision makers: Laplace principle Maximin principle Maximax principle Maximum likelihood principle Expectation principle
B
Who (hint: in the 19th century) urged politicians to design policies that maximized people's happiness, increasing their pleasures and reducing their pain? Daniel Kahneman Jeremy Bentham Barry Schwartz Ed Diener
B
Who developed the following alternate criterion for decision making? "Decisions are made so as to maximize expected utility rather than expected monetary value." Peterson Von Neumann and Morgenstern Madalla Dr. Nyce
B
Who looked at the "happy slave" problem and noted that poverty does not seem to make people as miserable as it should. Kahneman Amartya Sen John Stuart Mill None of the above
B
According to "Balancing Liberty and the Pursuit of Well-Being" which of the following are true statements: The free market fails to protect consumer interests The government could focus more on externalities than consumers if everyone exhibited rational behavior I only II only I and II Neither I or II
C
Changes to the law, such as the legalization of drinking and driving, are examples of: Physical hazard Moral hazard Societal hazard Liability hazard
C
Choose the individual whose beliefs were that the goal of moral and political action should be to maximize people's happiness. This person didn't reject utilitarianism, but tried to make it compatible with a broader view of human nature than Bentham. James Mill Amartya Sen John Stuart Mill None of the above
C
Insurance is an example of: Funded retention Unfunded retention Transfer Unplanned retention All of the above
C
Investments in Information is a method of: Risk (loss) control Risk (loss) financing Internal risk reduction Diversification None of the above
C
The possibility of an organization being sued because of a product injuring a customer is an example of which of the following sources of risk: Personal Property Liability Financial
C
Utility functions are usually a function of _________. Happiness Sadness Wealth Education
C
When measuring risk, impact is synonymous with: frequency likelihood severity Expected value Standard deviation
C
Which is an advantage of a corporation? Unlimited liability Life dependent on owners Ability to issue stock Both B and C
C
Which of the following best describes firms owning plants that perform different functions in the various stages of the production process? Conglomerates Multiplant firms Vertically integrated firms Industries
C
One of the core themes of the reading "A Scientific View of Risk" is that risk reduction has the following costs: Monetary Non-monetary Societal utility I only II only III only I and II I and III
D
Redistribution of income may occur through which of the following Market intervention Transfer payments Taxation All of the above None of the above
D
The likelihood of an earthquake is an example of which category of risk: core speculative dynamic static none of the above
D
What word best describes the amount of payoff someone would have to receive to be indifferent between that certain payoff and a given gamble? Risk premium Risk equivalent Aversion satisfaction Certainty equivalent
D
Which of the following is NOT one of the ways households dispose of their income? Personal Taxes Personal Savings Personal Consumption Expenditures All of the above are ways households dispose of their income
D
Which of the following is NOT part of government's role? Providing legal structure Maintaining competition Redistributing income All of the above are part of the government's role
D
Which of the following is the best measure of risk: frequency severity Expected value Standard Deviation All of the above
D
Which of the following is true regarding organizations? No natural risk aversion Utilize expected value, not expected utility Most project future cash flows from investments All of the above
D
According to the reading "Innovation Risk: How to Make Smarter Decisions", important characteristics of models include: Workings of model lack consistency Applications are inconsistent Results are not reproduceable All of the above None of the above
E
Which decision rule assumes all of the outcomes are equally likely: Maximin principle Maximax principle Maximum likelihood principle Expectation principle None of the above
E
Which decision rule uses the most information available: Laplace principle Maximin principle Maximax principle Maximum likelihood principle Expectation principle
E
Which of the following are steps of the decision making process: Identify all possible outcomes Identify all courses of action Determine the payoff function I only II only III only I and II I, II, & III
E
Which of the following is NOT a step in the risk management process: Determine objectives Identify risks Evaluate risks Implement the decision All of the above are steps in the risk management process
E
