ERM/Exam 4/Chapter 9

A coefficient of variation is derived by Select one: A. Dividing a distribution's standard deviation by its mean. B. Summing the squares of the differences between various points and a straight line on a graph. C. Dividing a distribution's standard deviation by its mode. D. Taking the square root of the sum of the squares of the differences between the outcomes and the mean of a distribution.

A. Dividing a distribution's standard deviation by its mean.

A financial analyst wants to evaluate the effect that a predicted increase in the cost of steel will have on the net income of East Side Manufacturing. Which one of the following measurement techniques should the analyst use? Select one: A. Earnings at risk B. Value at risk C. Cost at risk D. Conditional value at risk

A. Earnings at risk

In a normal distribution, fewer than 5% of outcomes are Select one: A. Outside two standard deviations above or below the mean. B. Between one and two standard deviations above or below the mean. C. Within one standard deviation above or below the mean. D. Between the mean and two standard deviations above or below the mean.

A. Outside two standard deviations above or below the mean.

Decision tree analysis and event tree analysis are similar in a number of ways, but differ in their Select one: A. Purpose. B. Process. C. Appearance. D. Approach.

A. Purpose.

During the last three years, Partridge has expanded its hours of operation to remain open 24 hours a day, 7 days a week. Partridge has also begun to carry a line of computer equipment, including small portable accessories such as flash drives, USB converters, and wireless accessories. Based on Partridge's loss history, the most appropriate forecasting technique is Select one: A. Trend analysis. B. Standard deviations. C. Empirical probability analysis. D. Theoretical probability analysis.

A. Trend analysis.

Regression analysis assumes that the variable being forecast Select one: A. Varies predictably with another variable. B. Can only be used when time is a variable. C. Can only be used when production is a variable. D. Stays constant and does not change over time.

A. Varies predictably with another variable.

Vandenberg Company retains workers compensation medical expenses. The risk manager ran a regression using workers compensation medical costs as the dependent variable and company payroll (in actual dollars) as the independent variable. Results of the regression were: y = .098 x + 5.20 Next year's payroll is expected to be $3,750,000. As medical costs continue to rise at a rate higher than inflation, the risk manager would like to adjust the expected medical costs upward by 10%. Based on this information, what are the expected workers compensation medical costs for next year? Select one: A. $372,227 B. $404,256 C. $409,970 D. $416,540

B. $404,256

If 95.44% of all outcomes are within two standard deviations above and below the mean and 2.15% of all outcomes are between two and three standard deviations above and 2.15% of all outcomes are between two and three standard below the mean, the percentage of all outcomes that lie beyond three standard deviations from (above and below) the mean is Select one: A. .13. B. .26. C. 2.15. D. 4.30.

B. .26.

Magruder Company would like to estimate the number of workers compensation claims to expect next year. Magruder's risk manager ran a regression analysis in which the number of workers compensation claims was the dependent variable and the number of payroll hours worked (in thousands) was the independent variable. The y-intercept from the regression was 3.8. The slope coefficient was 1.4. The risk manager believes that next year Magruder workers will work 80,000 payroll hours. Based on this information, approximately how many workers compensation claims should the risk manager expect next year? Select one: A. 15 B. 116 C. 305 D. 1,124

B. 116

he number of auto physical damage claims for fleet vehicles at Right-a-Way Delivery Service in any year is normally distributed. Next year, the expected number of fleet vehicle physical damage claims is expected to be 712 with a standard deviation of 25. Based on this information, what is the probability that between 737 and 762 auto physical damage claims will occur next year? Select one: A. 2.2% B. 13.6% C. 24.3% D. 27.2%

B. 13.6%

Determining earnings-at-risk (EaR) entails modeling the influence of factors such as Select one: A. Employee satisfaction and other subjective variables that can be used for financial organizations but not nonfinancial organizations. B. Changes in the prices of products and production costs on an organization's earnings. C. The potential for both positive and negative credit risk for the organization. D. Differences in the prices of products from competitors' prices.

B. Changes in the prices of products and production costs on an organization's earnings.

Maria is a risk management professional trying to analyze workers compensation loss frequency by cause of loss. Which one of the following forms of probability distribution would be most appropriate for her to use? Select one: A. Continuous B. Discrete C. Cumulative D. Theoretical

B. Discrete

Which one of the following statements is true if earnings at risk are $200,000 with 90% confidence? Select one: A. Earnings at risk are projected to be $180,000. B. Earnings at risk are projected to be less than $200,000 10% of the time. C. Earnings at risk are projected to be $200,000 90% of the time. D. Earnings at risk are projected to be greater than $200,000 10% of the time.

B. Earnings at risk are projected to be less than $200,000 10% of the time.

A group of large life insurance companies pooled their mortality data over the past 25 years. Based on the pooled mortality data, a mortality table showing the probability of death at specified ages was developed. The insurers used these probabilities in pricing life insurance products. The probabilities developed from the pooled mortality experience of the insurers are best described as Select one: A. Theoretical probabilities. B. Empirical probabilities. C. Conditional probabilities. D. Dependent probabilities.

B. Empirical probabilities.

Every probability distribution includes the probability of Select one: A. Mutually exclusive but not collectively exhaustive outcomes. B. Every possible outcome. C. 90% of the possible outcomes. D. Collectively exhaustive but not mutually exclusive outcomes.

B. Every possible outcome.

Insurance and risk management professionals use measures of dispersion of the distributions of potential outcomes to gain a better understanding of loss exposures being analyzed. Which one of the following is true regarding the standard deviation of a distribution? Select one: A. It is the average value of predicted losses estimated from an empirical distribution. B. It indicates how widely dispersed the values in a distribution are. C. It can only be calculated when the probability of each outcome in a sample of data is known. D. It is the probability of each possible outcome in a sample of data.

B. It indicates how widely dispersed the values in a distribution are.

which one of the following best describes a probability distribution? Select one: A. It is a table, chart or graph that shows how many of each type of identified loss will occur during the next 12-month period. B. It represents probability estimates for a particular set of circumstances and the probability of each possible outcome. C. It shows the likelihood of particular future events and an estimate of the financial consequences of each predicted event. D. It predicts future events based on the frequency and severity of past events.

B. It represents probability estimates for a particular set of circumstances and the probability of each possible outcome.

Which one of the following describes how probabilities are expressed? Select one: A. Graphically, using a pie chart or a bar graph B. Numerically, as a fraction, a percentage, or a decimal C. As a number of expected occurrences out of one hundred possible occurrences D. Verbally, using words such as "impossible", "likely", or "certain"

B. Numerically, as a fraction, a percentage, or a decimal

Which one of the following statements is correct with respect to continuous probability distributions? Select one: A. They are typically used for loss frequency analysis rather than severity analysis. B. One way of presenting a continuous probability distribution is to divide the distribution into a countable number of bins. C. There are a finite number of possible outcomes in a continuous probability distribution. D. They are most effectively illustrated using tables and pie charts.

B. One way of presenting a continuous probability distribution is to divide the distribution into a countable number of bins.

A main difference between decision trees and event trees is Select one: A. The process that is used to prepare the diagrams. B. That event trees analyze the consequences of accidental events rather than decisions. C. The portrayal and analysis of various pathways. D. That decision trees have one possible outcome; event trees have several possible outcomes.

B. That event trees analyze the consequences of accidental events rather than decisions.

Widget Manufacturing Company has noticed that its loss frequency and severity has increased in the past two years as its production has increased. In order to better forecast loss frequency and severity, Widget Manufacturing Company should consider using Select one: A. Theoretical probability analysis. B. Trend analysis. C. Empirical probability analysis. D. Distribution analysis.

B. Trend analysis.

Management of LMN Insurance Company is considering investing in the Stability-Growth Mutual Fund; however they are concerned about the volatility of the investment. The fund's manager said that on any given day, there is a 5% probability of losing more than 3% of the investment's worth. The statistic quoted by the fund manager is Select one: A. Coefficient of variation. B. Value-at-risk. C. Standard deviation. D. Earnings-at-risk

B. Value-at-risk.

Which one of the following statements is true regarding characteristics of normal distributions? Select one: A. The normal curve touches the horizontal line at the base of the distribution at only two points. B. When graphed, a normal distribution generates a bell-shaped curve. C. In theory, the normal distribution assigns some negative probability no greater than zero for every outcome. D. Insurers cannot use normal probability distributions to predict future losses but they are able to use them to control or mitigate future losses.

B. When graphed, a normal distribution generates a bell-shaped curve.

Which one of the following statements about event tree analysis is true? Select one: A. Event trees show the results of a progression of decisions. B. Event trees assume no risk control measures have been deployed. C. Event trees can be used for qualitative analysis, but not for quantitative analysis. D. Event trees analyze the consequences of accidental events.

D. Event trees analyze the consequences of accidental events.

The weighted average of all of the possible outcomes of a probability distribution is the Select one: A. Median. B. Dispersion. C. Mode. D. Expected value.

D. Expected value.

Which one of the following is a benefit of the conditional value at risk (CVaR) method? Select one: A. It evaluates different market conditions B. It allows for changes in the portfolio. C. It is designed for nonfinancial organizations. D. It takes into account the extremely large losses that may occur.

D. It takes into account the extremely large losses that may occur.

Which one of the following is the initiating event in an event tree analysis? Select one: A. Warehouse building catches fire due to lightning B. Automatic sprinkler system is not activated C. Detection system notifies the fire department D. Lightning strikes a warehouse building while it is closed for the weekend

D. Lightning strikes a warehouse building while it is closed for the weekend

Which one of the following statements regarding probability is correct? Select one: A. The probability of an event that is absolutely certain is 0. B. The accuracy of theoretical probabilities depends on the size and representative nature of the samples being studied. C. Risk management professionals use theoretical probabilities because they are generally available for and applicable to claim analysis D. Probabilities associated with events such as coin tosses can be developed from theoretical considerations and are unchanging.

D. Probabilities associated with events such as coin tosses can be developed from theoretical considerations and are unchanging.

Which one of the following statements is correct with respect to empirical probability distributions? Select one: A. Event categories (bins) are designed so that only the most probable events are included. B. The sum of all empirical probabilities in a distribution can be any number. C. Any given event can fall into one or more categories of event (bins). D. They provide a mutually exclusive, collectively exhaustive list of outcomes.

D. They provide a mutually exclusive, collectively exhaustive list of outcomes.

An analysis that identifies mathematical patterns in past losses and then projects these patterns into the future is Select one: A. Theoretical probability analysis. B. Distribution analysis. C. Empirical probability analysis. D. Trend analysis.

D. Trend analysis.

InterMountain Railroad carries logs, lumber, plywood, and other forest products in a six-state region in the Western part of the United States. InterMountain self-insures its derailment cargo losses. The risk manager at InterMountain ran a regression using ton-miles (one ton of cargo carried one mile) as the independent variable and dollar losses as the dependent variable. The independent variable is in units per 10,000 and the dependent variable is per 1,000. The resulting regression equation is: y = 2.65 x + (−13.8) Next year, InterMountain estimates that it will record 5,000,000 ton-miles of shipments. Given a building materials shortage, projected for next year, the cargo will be more valuable, so a 12% increase in value factor should be applied to the dollar loss estimate. Based on this information, what are InterMountain's final expected derailment cargo losses for next year, rounded to the nearest $10? Select one: A. $1,470 B. $146,850 C. $1,468,540 D. $14,839,990

C. $1,468,540

An organization's premises and operations liability losses have a severity distribution with a mean of $10,000 and a standard deviation of $15,000. What is the coefficient of variation for this distribution? Select one: A. .60 B. .67 C. 1.5 D. 1.67

C. 1.5

An insurer is beginning to write business in a new state. The claim manager, Carla, wants to know how many new claim representatives to hire to accommodate the additional volume of claims. Based on the marketing department's estimate and industry data, Carla has determined the mean number of new claims to be 2,000, with a standard deviation of 1,000 in a normal distribution. If a claim representative can typically adjust 600 claims per year, and Carla wants at least 66% certainty that she has enough representatives, which one of the following represents how many representatives she will need to hire? Select one: A. 2 B. 3 C. 5 D. 6

C. 5

Assume that the expected safe life of a heating element for a particular type of furnace is 4,000 hours with a standard deviation of 200 hours, and that the expected safe life conforms to a normal distribution. If the maintenance schedule requires that the element be replaced after 4,000 hours, which one of the following represents the chance that the heating element will become unsafe before being replaced? Select one: A. 30% because of the effect of the standard deviation applied to the 4,000 hour mean B. 40% because there is a 10% tolerance allowance C. 50% because 50% of the normal distribution is below the 4,000 hour mean D. 60% because there is a 10% tolerance allowance

C. 50% because 50% of the normal distribution is below the 4,000 hour mean

An empirical probability is based on Select one: A. Scientific principle. B. Logic. C. Historical data. D. Theory.

C. Historical data.

One difference between theoretical probability distributions and empirical probability distributions is that for empirical probability distributions the Select one: A. Outcomes are not necessarily collectively exhaustive. B. Outcomes are not necessarily mutually exclusive. C. Probabilities may change as new data are discovered. D. Results are always expressed as a percentage.

C. Probabilities may change as new data are discovered.

Which one of the following statements is true with regard to linear regression analysis? Select one: A. For any past year, the dependent variable must plot on the regression line. B. Actual future values must equal the values forecast through regression analysis. C. The regression line represents the "best fit" of a straight or smoothly curved line to actual historical data from prior periods. D. Regression analysis can only be applied if the dependent variable increases over time.

C. The regression line represents the "best fit" of a straight or smoothly curved line to actual historical data from prior periods.

Regression analysis assumes that Select one: A. For any given past year, the projected trend value will be the same as the actual outcome. B. The linear regression line is more accurate the further it gets from the actual data values used. C. The variable being forecast varies predictably with another variable. D. Dependent variables are unaffected by independent variables.

C. The variable being forecast varies predictably with another variable.

A chart showing the probability of obtaining the numbers one through six on one roll of one die represents a Select one: A. Trend analysis distribution. B. Empirical probability distribution. C. Theoretical probability distribution. D. Continuous probability distribution.

C. Theoretical probability distribution.

The normal distribution is a probability distribution that, when graphed, generates a particular type of curve. Which one of the following best describes that curve? Select one: A. Skewed either right or left B. Wide and flat C. Narrow and peaked D. Bell-shaped

D. Bell-shaped

Which one of the following statements is true regarding event tree analysis? Select one: A. Event tree analysis can be used to select the most effective strategy to achieve a goal. B. Event tree analysis provides only quantitative information. C. Event tree analysis provides only qualitative information. D. Event tree analysis typically provides only two options, success or failure.

D. Event tree analysis typically provides only two options, success or failure.