Exam 1 Corporate

There are many benefits of risk management for a business. Without risk management, senior management might be reluctant to undertake activities deemed too risky, depriving the business of potential benefits. This benefit of risk management is: a.

Reduction of deterrence effects of hazard risks 22.

Chuck is Vice president of Claims for Insurance Company... Analyze of relationships... Over time... The technique Chuck used to relate indicators to outcomes is called: a.

Regression analysis 132.

Which one of the following steps in the enterprise-wide risk management process includes an evaluation of how each of the organization's risk management processes aligns with its overall objectives

Scan the environment

One category of operational risk that a business must manage is risk associated with people. One of the strategies to mitigate people risk is to use care when hiring employees. This strategy employs background checks, pre-employment tests, and checking references. This strategy is: a.

Selection 121.

Which one of the following is a main theoretical concept that explains how traditional risk management works? a.

Silo approach 62.

Which one of the following risk management program goals enhances an organization's reputation? a.

Social responsibility 27.

A new computer chip that could position a company for explosive growth is an example of: a.

Strategic risk 50.

Hardware Store has been able to control its prices and inventory since it has no competitors. A new highway currently being constructed is going to allow increased competition for Hardware Store. According to the quadrants of risk, the risk of increased competition falls into the category of: a.

Strategic risk 57.

Which one of the following statements is true regarding strategic risks?

Strategic risks are external to an organization

One benefit of risk management to the economy is the reduction of the potential for a major disruption in the functioning of financial markets and the financial system. This risk that is reduced is called: a.

Systemic Risk 23.

There has been a movement in both the U.S and internationally to help organizations improve their risk management practices. Economists believe that risk management must expand to address which one of the following? a.

Systemic risk 12.

Regarding diversifiable and nondiversifaible risk, which one of the following statements is accurate? a.

Systemic risks are generally nondiversifiable 42.

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

Systems 122.

In determining economic capital for insurers, various risks are quantified. One such risk is the potential for adverse loss experience or catastrophic losses. This risk is known as

Insurance risk

Many organizations derive their competitive advantages from patents, copyrights, trademarks, and trade secrets. These are all examples of: a.

Intangible property 84.

Jane wrote a book and copyrighted the material. The copyright on Jane's book is: a.

Intangible property 96.

Which one of the following types of property has no physical form? a.

Intangible property 97.

The fundamental purpose of a risk management framework is to

Integrate risk management throughout the organization

Three main theoretical concepts explain why ERM works. Which one of the following correctly lists those three concepts? a.

Interdependency, correlation, and portfolio theory 65.

Risk can be classified as pure or speculative. Which one of the following is the best example of a speculative risk? a.

Investing in shares of stock 46.

The concept of correlation, in the context of why enterprise risk management works, a.

Is the proposition that correlation increases risk while uncorrelated risks can reduce risk 61.

Which one of the following statements is true about both the enterprise-wide risk management process and the traditional risk management process

It is a cyclical process that provides for continuous improvement

Which one of the following is a benefit of the conditional value at risk (CVaR) method? a.

It takes into account the extremely large losses that may occur 142.

A hotel decides to pay the medical bills for guest who sustains an injury on the premises even though the hotel did not cause or contribute to the injury. Which one of the following types of net income loss exposures is the hotel trying to avoid? a.

Loss of goodwill 90.

Insurance companies use a number of measures to track their operating performance. One measure employed compares the amount the insurer has paid in losses to the premiums it has earned. This measure is the insurer's: a.

Loss ratio 129.

Because losses cannot be eliminated, an organization must decide whether to retain or transfer its loss exposures. Which one of the following describes losses which are typically retained? a.

Losses with low frequency and low severity 76.

An insurer's fair value is complicated because no ready market exists for trading in insurers. To calculate the fair value of an insurer's reserves, a present value discount is used and a

Market value margin is added

The purpose of all workers compensation laws is to provide: a.

Medical and wage replacement benefits to injured employees 114.

Scribner Trucking Company implemented an ERM program. The company manages the risk of fuel prices through a hedging program. The risk manager must also manage traditional hazard risk arising from the trucking company's operations. The number of accidents in which Scribner trucks are involved has been increasing at a fast rate. Accidents have been occurring at night, during adverse weather conditions, and when Scribner drivers were speeding. The number of accidents has led to increased auto, cargo and workers compensation losses. Based on these facts, which one of the following changes should be implemented in the hazard risk portion of the enterprise risk management program?

Modification of the impact/likelihood of the risk

There are several steps in the enterprise-wide risk management process. One step includes determining the effectiveness of controls, observing changes in the internal and external environment, and obtaining information to improve risk assessments. This step in the enterprise risk management process is

Monitor and assure

The final step in the traditional risk management process is which one of the following

Monitoring results and revising the risk management program

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: a.

Moral hazard 113.

Despite being frequently reminded otherwise, Laura was in the habit of leaving her car door unlocked, often with her purse inside. As a result, Laura's car was stolen, along with her purse. Laura's behavior is an example of: a.

Morale hazard 112.

Driving carelessly or failing to lock an unattended building are examples of: a.

Morale hazard 103.

The traditional risk management approach views risk as having only which one of the following types of consequences

Negative

The traditional definition of risk management reflects the traditional concept of risk as: a.

Negative 5.

Which one of the following types of losses are considered indirect losses? a.

Net income losses 87.

Value at Risk (VaR) is a method of determining the probability of loss on an investment probability of loss on an investment portfolio ever a certain time horizon. The VaR method includes which one of the following assumptions? a.

No trading in the portfolio 143.

Risk Management programs should: a.

Operate economically and efficiently 30.

Jean is the risk manager of a Fortune 1000 company. Her CFO has tasked her to analyze vulnerabilities in the firm's supply chain. The adequacy of suppliers to meet an organization's needs would be an example of which of the following types of risk: a.

Operational risk 49.

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

Operational risk is integrated in every activity of an organization 123.

Which one of the following best describes the categories of risk included in the enterprise risk management model? a.

Operational, Strategic, Financial, and Hazard 51.

For insurance and traditional risk management purposes, loss exposures are typically divided into four types. Which one of the following lists those four types? a.

Property, liability, personnel, and net income 106.

Julie, a risk management professional, has identified automobile accidents by the sales department employees as a major loss exposure for her organization. She is in the process of examining the feasibility of various risk management techniques for this exposure. Which one of the following is a risk financing technique?

Purchase automobile insurance with a low deductible

Insurance deals primarily with: a.

Pure risks 39.

Harold insures his home which is on a one-acre site with many trees. The trees on Harold's property are: a.

Real property 95.

Which one of the following is a benefit to a particular organization of risk management? a.

Reduce the cost of risk 16.

Which one of the following is a common risk management benefit the entire economy would realize as a consequence of a risk management program? a.

Reduced waste of resources 24.

Using existing processes is key to the successful integration of the risk management framework and process. Using existing processes serves which one of the following purposes?

Reduces the usual resistance to change from introducing new procedures

Which one of the following risk control techniques is being used by a manufacturer that installs a wet-pipe sprinkler system in its warehouse? a.

Reduction 75.

The number of losses that occur within a specified period defines

Loss frequency

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: a.

A strategic risk 59.

To avoid an overlap between personnel loss exposures and liability loss exposures, risk management professionals usually classify the diminished value of key employee services as: a.

A personnel loss exposure 100.

Classifying risk appropriately can help in managing risk. Which one of the following statements is correct with respect to the classifications of risk? a.

A pure risk is a chance of loss or no loss, but no chance of gain 47.

Which one of the following statements is true regarding key risk indicators (KRI)? a.

A KRI must be leading, rather than lagging, to be effective 131.

In risk management terminology, a peril is: a.

A cause of loss 79.

Which one of the following is an element of a loss exposure? a.

A cause of loss 101.

A property loss exposure is a condition that presents the possibility that a person or organization will sustain a loss resulting from: a.

A damage of property in which that person or organization has a financial interest 93.

Selecting the appropriate risk management techniques is based on which one of the following

A forecast of the frequency and severity of expected losses

All of the following are elements of a loss exposure, EXCEPT: a.

A loss control method 89.

Any condition that presents a possibility of loss, whether or not an actual loss occurs best defines a.

A loss exposure 110.

Which one of the following types of organization would most likely be affected by commodity price risk? a.

A manufacturer 137.

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 customer account data. This operational risk for Sixth National Bank is: a.

A systems risk 127.

Pacific Pine is a forest products company based in the state of Washington. Pacific Pine harvests timber on six large tracts of land they own. Most of the wood harvested is shipped to countries in the Pacific Rim. A key economic risk that Pacific Pine faces is that one or more of the Pacific Rim countries will impose a fee on imported wood to protect domestic lumber companies. Such a fee is called

A tariff

An example of an intangible asset that an individual may possess is: a.

A unique skill set 111.

All of the following are components of the cost of risk to an organization, EXCEPT: a.

Advertising Expenses 19.

A risk management plan that considers all of the risks that an organization faces, including operational, financial, and strategic risks, is called: a.

An enterprise risk management plan 67.

Which one of the following organizations would most likely be able to compete effectively during financial crises?

An organization with large cash reserves

Every loss exposure has which one of the following elements? a.

Asset exposed to loss 83.

Buildings, investments, patents, and human resources are all examples of: a.

Assets exposed to loss 102.

Which one of the following is a positive risk for a start-up business? a.

Attracting investor interest 7.

Mega-Pharma is a large drug company. After several claims were made that its hypertension drug Menivex caused heart damage, Mega-Pharma immediately withdrew Menivex from the market and ceased production of the drug. In this case, Mega-Pharma dealt with the risk of additional product liability claims by using: a.

Avoidance 81.

The process of comparing the key risk indicators of an organization with those of other organizations in the same industry is known as: a.

Benchmarking 128.

A peer-to-peer method for performing any contract that establishes ownership of the property throughout its useful life and offers a simplified, efficient, transparent transaction that is permanently recorded and date-stamped in a distributed ledger is: a.

Blockchain 125.

Carol has worked as a payroll clerk for a small organization for 20 years. Ove the years she received only two small salary increases and began to embezzle funds from the company since she felt she was not adequately compensated for her job efforts. In terms of the quadrants of risk, Carol's theft risk can be classified as: a.

Both a hazard risk and an operational risk 60.

Commercial package policies typically include coverage for business property, liability, and: a.

Business income 117.

Jancy Manufacturing has experienced an increase in employee injuries over the last three years. Jancy's risk manager has met with the various stakeholders throughout the organization and has the support of senior management to design and implement risk management framework and process. Which one of the following individuals would be the best person to communicate Jancy's commitment to risk management and employee safety?

CEO

Myers Metal Company is a diversified organizations with operations in the U.S., Europe, South America, and Africa. The company operates mines, metal foundries, and steel plants. The previous risk manager was fired and a new RM was just hired. The CEO, CFO, and company controller met with the new RM and asked her to design and implement an ERM program. At the meeting, both the CEO and CFO ex[ressed concern about acceptance of the new ERM approach. The RM suggested that a representative of the company should announce the change in RM philosophy and attempt to get workers and managers to accept the new approach. Which one of the following officials would be best-positioned to announce the new approach and attempt to gain acceptance of it?

CEO

An insurer can eliminate interest rate risk through which of the following? a.

Cash matching 138.

Determining earnings-at-risk (EaR) entails modeling the influence of factors such as: a.

Changes in the prices of products and production costs on an organization's earnings. 144.

Cromley Department Store has 30 stores located throughout the U.S. An increase in the frequency and severity of general liability claims over the last three years has encouraged Cromley's risk manager to design and implement a risk management framework and process. Cromley has decided to replace the carpeting at several locations, purchase additional storage equipment, and train employees on premises safety. Cromley is in which one of the following stages of designing and implementing a risk management framework and process?

Commitment of resources

The deterrence effect refers to: a.

Companies foregoing profitable or beneficial activities due to perceived risk 15.

Which one of the following statements is true regarding the basic measures that apply to risk management? a.

Consequences measure the degree to which an occurrence could positively or negatively affect an organization 35.

The Basel I capital requirements differ from capital-to-assets ratios used prior to 2003 by a.

Considering the relative risk of the assets.

Surety bonds and builders' risk coverage forms are commonly purchased by businesses in which one of the following industries? a.

Construction 118.

Which one of the following risk management program goals is an essential goal for all public entities? a.

Continuity of operations 28.

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 underwriting offices. The indicators of underwriting performance Insurance Company uses are called: a.

Control indicators 133.

In an effort to grow its personal lines book, an insurer decides to offer discounts on homeowners and personal auto insurance to the employees of its largest business lines account. Which one of the following risk measures is most likely to increase as a result of this marketing decision? a.

Correlation 37.

The total cost incurred by an organization because of the possibility of accidental loss is the organization's: a.

Cost of risk 18.

The sum of all expenses incurred by an organization because of the possibility of accidental loss is called the: a.

Cost of risk 21.

To an insured organization, which one of the following is an example of a cost of risk associated with an asset or activity? a.

Cost of sprinkler systems 25.

General liability insurance a.

Covers the insured's legal defense costs when defending against a claim of liability 116.

Which one of the following types of financial risk has only negative potential? a.

Credit risk 136.

Fire, wind, theft, business interruption, sickness and disability, and liability claims are all considered: a.

Hazard risks 72.

Risks from accidental loss, including the possibility of loss or no loss defines: a.

Hazard risks 10.

Avoidance can be called proactive avoidance when the organization: a.

Decides not to assume a loss exposure in the first place 74.

Avoidance can be called abandonment when the organization a.

Decides to eliminate an existing loss exposure 71.

A vitamin manufacturer has decided to dedicate research funding to developing products for senior citizens rather than infants. The manufacturer is responding to which one of the following types of strategic risks?

Demographics

One strategic risk confronting organizations is changes in the statistical characteristics of human populations. Increasing longevity may make it difficult for a company to pay post-retirement health care benefits and pension benefits, and decreasing fertility rates may reduce sales, for baby-products companies. This strategic risk is called

Demographics

Jordan is a risk manager of Burroughs Mills, a textiles and clothing company. Jordan just renewed the company's property insurance. The insurance that Jordan purchased on the company's warehouse covers all losses except those losses that are excluded. If a loss occurs, the insurer will take depreciation into consideration when determining the loss settlement. Which one of the following descriptions applies to the property insurance Jordan purchased? a.

Direct physical loss, Actual cash value coverage 120.

Risk can be classified as diversifiable or nondiversifiable. Which one of the following statements is true with respect to this type of risk classification? a.

Diversifiable risk tend not to be correlated so they can be managed through diversification or spread of risk. 40.

A disadvantage of value-at-risk (VaR) is that VaR: a.

Does not accurately measure the extent to which a loss might exceed the threshold. 140.

Loss severity is usually measured in terms of

Dollars

A sand and gravel business keeps extra vehicles in reserve in case its active vehicles need to come out of service. What risk management technique is being used? a.

Duplication 80.

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

Earnings at risk are projected to be less than $200,000 10% of the time 141.

A group of female employees at Third Federal Bank filed a lawsuit against the bank. The lawsuit alleges that the bank consistently failed to promote qualified women to senior management positions because of their gender. If the lawsuit is successful, which one of the following coverages would pay the damage award? a.

Employment practices liability insurance 119.

Which one of the following explains how enterprise risk management differs from traditional risk management?

Enterprise risk management addresses strategic, financial, operational, and hazard risk while traditional risk management addresses hazard risk along with some operational risk

Which one of the following statements is accurate regarding pure and speculative risks? a.

Every business venture involves speculative risks 43.

A net income loss exposure is a condition that presents the possibility of loss caused by a reduction in net income. In a given time period, net income equals revenue minus: a.

Expenses and income taxes 107.

Which one of the following provides a measure of the maximum potential damage associated with an occurrence? a.

Exposure 33.

Carmen is the risk manager of Brighton Software Company (BSC). She was directed by the president of the company to implement an enterprise risk management (ERM) program. Carmen called a meeting of the lead person in Brighton's finance, safety, accounting, and legal areas. She explained the concept of ERM at the meeting, and asked for cooperation. After the meeting, she encountered resistance from these leaders. The chief financial officer said, "Don't tell me how to do my job." The head of accounting said, "We've managed credit risk just fine without your help, why don't you stick to insurance." The lack of cooperation, despite repeated appeals, lead to the failure of the ERM program. In this case, the implementation of an ERM program was not successful because of

Failure to integrate the program with existing processes

Every loss exposure has which one of the following elements? a.

Financial consequences of loss 108.

Fluctuations in the value of stocks or bonds due to interest rate changes is an example of: a.

Financial risk 48.

George works for a large company and part of his job is to monitor assets according to their liquidity. George is particularly concerned that the company fleet cars are affecting its liquidity and rising fuel prices are having an adverse effect during tight economic markets. If George's concerns were categorized as causes of loss according to the quadrants of risk, his concern most directly relates to which one of the following types of risks? a.

Financial risks 56.

Most organizations face some market risk, credit risk, and/or price risk. Collectively, these risks are called: a.

Financial risks 134.

Insurance deals primarily with which one of the following major categories of risk? a.

Hazard risk 78.

One of the levels of risk a business faces is the risk of accidental loss, including the possibility of loss or no loss. This category of risk is: a.

Hazard risk 8.

Which one of the following types of risks can result in losses but not in any gains? a.

Hazard risks 4.

In remodeling the primary office location, Phil, who is a partner in his family's construction business, found asbestos in the attic of the building. He is concerned not only about the current tear-our exposure but is also aware that asbestos may have resulted in unidentified harm. In the quadrants of risk, Phi's concern about the asbestos most likely falls into which one of the following quadrants of risk? a.

Hazard risks 58.

Mega-Brands is an anchor store at Giganto Mall. If Mega-Brands is shut down due to fire, the local community may sustain which of the following consequences? a.

Job Loss 17.

Elliot is the new RM of Consolidated Agriculture Products. The company has corporate farms that grow grain in six Midwestern states. The company trades futures contracts on grain and foreign currencies. In an effort to establish accountability in the enterprise risk management program Elliot is implementing, he is using financial measures to determine potential losses from property damage, liability, claims, farming operations, grain futures trading, currency futures trading, and each of the other loss exposures the company faces. These metrics of potential losses are called

Key risk indicators

The president of Agricultural Products Company (APC) told the risk manager, Tom, to implement an enterprise risk management (ERM) program. Tom was a "traditional" risk manager who had managed APC's property, liability, and personnel-related risks for the last 12 years. Under the new plan, he was supposed to manage commodity price risk, currency exchange rate risk, and strategic risk. When Tom asked for assistance (hiring an outside expert, time to get up to speed on financial risk, etc.) his requests were denied. After six months, the president declared the ERM program a failure and told Tom to revert to the previous risk management plan. APC's experiment with ERM was not successful because of

Lack of commitment of resources

An organization must meet the standard of care that it owes to others in order to ensure that: a.

Legal obligations are satisfied 31.

Jim's Crab hut restaurant has just added an extra seating section. The restaurant's risk manager is extremely concerned with the fact that this section requires customers to take a small step down to enter the section and it may be easy to miss the step and fall. This exposure of concern to the risk manager is a: a.

Liability loss exposure 91.

Loretta leases and operates a wine and cheese shop where she conducts wine tasting sessions. Loretta's annual income is steady and she has four well-trained employees. From a risk management perspective, the loss exposure that should concern Loretta most is the: a.

Liability loss exposure 98.

The relationship between which two basic measures is critical for risk management in assessing risk and deciding whether and how to manage it? a.

Likelihood and consequences 34.

Mid-State Packing company, a meat processing company, is the largest private sector employer in Metro City. First National Bank of Metro City loans money to Mid-State Packing Company and to many of the employees of Mid-State. The problem with First National Bank of Metro City Loaning money to both the business and many employees of the business is that: a.

Loan defaults are likely to be highly correlated 38.

Any condition that presents a possibility of loss, whether or not an actual loss occurs is known as a: a.

Loss exposure 82.

Risk management professionals analyze loss exposures along four dimensions. Which one of the following dimensions analyzes the number of losses within a specific time period?

Loss frequency

Which one of the following categories of operational risk includes many risks which are hazard risks or other forms of insurable risk? a.

People 124.

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

People 130.

Jack has recently been hired as a risk management professional for Blithe Corporation. Blithe has a risk management program in place, but Jack has advised senior management that he would like to design and implement a risk management framework and process based on a recognized international standard. Which one of the following is the first step that Jack should take in designing and implementing the new framework and process

Perform a gap analysis

Another term for cause of loss is: a.

Peril 109.

The cause of loss is also referred to as a: a.

Peril 77.

Jemma has two pairs of earnings she wants to ensure against theft. Jemma's earnings are categorized as: a.

Personal property 94.

Death, disability, retirement, and resignation are causes of loss commonly associated with which one of the following types of loss exposures? a.

Personnel loss exposures 86.

Joshua Kelly is the genius behind Puzzles, inc. so much so, that without Joshua's talents and skills, Puzzles, inc. could not exist. The corporation owns three large facilities, one of which is dedicated to distribution. The gross revenues of the organization exceed $30 million annually. Jordan Caine, risk manager for Puzzles, inc. should be most concerned about the corporation's: a.

Personnel loss exposures 99.

Fair value accounting uses the term market value surplus (MVS) for an organization's net worth. Which one of the following is the term used for an insurer's net worth under statutory accounting principles (SAP)?

Policyholder's surplus

U.S. Petroleum Company would like to purchase oil chilling rights in another nation. That nation, however, is run by a dictator who last year confiscated another foreign company's oil equipment. U.S. Petroleum decided to enter the country through a joint venture with the dictator's brother who heads a small oil company. By entering the foreign nation through a joint venture, U.S. Petroleum was addressing which risk?

Political risk

One category of operational risk includes procedures and practices organizations use to conduct their business activities. This category is: a.

Process risk 126.

Most general liability insurance policies include coverage for which one of the following? a.

Product liability 115.

The financial consequences of loss can generally be established quickly and with a high degree of certainty following a loss in which one of the following categories? a.

Property 88.

Sydney's Paint and Body Shop has experienced an increase in its volume of business as well as an increase in inventory, supplies, and transactions. Sydney has not hired additional employees, nor have his profits substantially increased but he has noticed more clutter around the paint shop in terms of oily rags, supplies, paint, and waste. If Sydney viewed his business in terms of risk exposures, the exposures he would be most concerned about would be the: a.

Property Loss exposures 92.

When interest rates were high, Protection First Insurance Company purchased a $1,000 corporate bond that will pay $80 in interest annually until in matures in 15 years. Based on the purchase price, this bond will provide Protection First a 10% annual rate of return if the insurer holds the bond until it matures. Six years after the bond was purchased, interest rates had declined significantly. Although the bonds still pay $80 in interest annually, Protection First can no longer earn a 10% rate of return on the periodic interest payments. This risk is called: a.

Reinvestment risk 139.

The level of capital required to provide a cushion against unexpected loss of economic value at a financial institution is known as

Risk Capital

Reference standards, measures, or expectations used in judging the significance of a given risk in context with strategic goals are called

Risk Criteria

The process of making and implementing decisions that enables an organization to optimize its level of risk is called: a.

Risk Management 9.

Risk Management reviews the cost of risk associated with protecting cash flows, assets, and personnel. Which one of the following statements best describe the key components of an organization's cost of risk? a.

Risk Management department costs, Retained losses, premiums, and risk control costs 20.

Risk management professionals should evaluate the internal and external environments in which the organization operates. Which one of the following is a factor of an organization's internal environment?

Risk appetite

A conscious act or decisions not to act that reduces the frequency and severity of losses or makes losses more predictable best defines

Risk control

Don is the risk manager for Rafferty corporation. One of his peers, Sally, asks him one day, "How do you define risk?" When don replies, which one of the following statements is accurate? a.

Risk has different meanings within the risk management and insurance communities 11.

A tool for communicating the risk management objectives and how the objectives will be achieved is known as a

Risk management policy statement

Paula just took over as risk manager of Agri-Products Company. The company produces agricultural chemicals and buys and sells agricultural commodities. The previous risk manager had attempted to institute an enterprise risk management program and failed. One of Paula's first moves was to formulate a mission statement and a bullet-point list of the organization's risk management philosophy. This clearly-stated list of objectives and statements of how the objectives will be achieved is a

Risk management policy statement

Which one of the following is a type of risk that enterprise risk management would treat but that traditional risk management would not? a.

Risk of changes in commodity prices, such as fuel or raw materials 69.

Which one of the following is a risk that enterprise risk management would treat but that traditional risk management would not? a.

Risk of changes in economic conditions, such as growth or recession 68.

When a business uses insurance in its risk management program, it is using which one of the following methods to deal with a loss exposure? a.

Risk transfer 73.

Which one of the following is one of the five steps of the enterprise risk management (ERM) process model?

Scan environment

Billy Owns a beach front cottage which has become his primary residence. Billy's primary concern is that his home will be hit by a hurricane and badly damaged or even destroyed. For Billy, this hurricane risk is a: a.

Subjective Risk 52.

Jane always drives to visit her children who live one thousand miles away. She enjoys driving and feels safer in a vehicle than on an airplane because she feels she has more control of her fate. This driving vs flying decision is an example of: a.

Subjective risk 55.

Risk can be classified as subjective or objective. Which one of the following statements is correct with respect to these risk classifications? a.

Subjective risk can exist even where object risk does not 45.

Catastrophes such as recent Earthquakes and the 2011 Tsunami in Japan pointed out a need for many organizations to evaluate and manage their: a.

Supply-Chain Risk 3.

Which one of the following is an essential to an effective risk management program? a.

Support of the organization's senior management 29.

Risk that is common to all securities of the same general class and cannot be eliminated through diversification is called: a.

Systematic risk 135.

The Dodd-Frank Act, Solvency II, and Basel III all have the purpose of reducing: a.

Systemic Risk 14.

Which one of the following requires that financial bank holding companies and certain other public companies have a risk committee and at least one member of the committee must be a risk-management expert? a.

The Dodd-Frank Act 13.

Which one of the following statements is true regarding enterprise risk management? a.

The ERM framework encompasses all stakeholders in the organization 63.

Which one of the following statements is true regarding the evolution of risk and risk management? a.

The definition of risk has evolved to include positive as well as negative attributes 6.

Worthley's is a retail clothing store chain with 20 locations in the northeastern United States. Most of the stores are located in free standing buildings with parking lots. Wothley's has been experiencing an increase in the frequency and severity of general liability claims. Samuel, the risk manager, is in the early stages of designing and implementing a risk management framework and process. Which one of the following should be evaluated as part of Worthley's internal environment?

The experience level of employees at the various stores

Which one of the following statements is true regarding the financial consequences of loss? a.

The financial consequences depend on the type of loss exposure, the cause of loss, and the loss frequency and severity. 104.

Which one of the following is true regarding risks? a.

The inability to easily distribute products is an operational risk 2.

During the past year, International Toys has undertaken four capital projects. The company has renovated and refurbished one of its aging warehouse buildings. It has purchased the most recent version of its current order processing computer software. It has added two trucks to its fleet of delivery vehicles. Lastly, it has purchased a new production machine that will allow it to launch a new product line. Which one of the following company projects is the most speculative risk? a.

The new production machine 53.

A risk management policy statement is a tool for communicating

The objectives of the risk management program

When implementing an enterprise risk management program, it is common to perform a gap analysis. Gap analysis compares

The organization's existing risk management framework and processes against a recognized risk management standard

Three main theoretical concepts explain why ERM works. One theoretical concept considers not only the combination of individual risks but also their interactions. This theoretical concept is: a.

The portfolio theory 66.

According to the law of large numbers, as the number of exposure units insured increases, a.

The relative accuracy of predictions about future losses increases 36.

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? a.

The rental property presents both pure and speculative risk; property values may increase, and the building could burn down. 54.

The focus of risk quadrants is different from the focus of risk classification in general. While the classifications of risk focus on some aspect of the risk itself, the four quadrants of risk focus on: a.

The source of risk and who has traditionally managed it 41.

Which one of the following is usually the single largest impediment to successful implementation of Enterprise risk management? a.

The traditional organizational culture 64.

The most significant difference between the enterprise-wide risk management process and the traditional risk management process is

The types of risk addressed

Which one of the following financial consequences of loss can be established with a high degree of certainty fairly soon after the loss occurs? a.

The value of a building that has been damaged by fire 105.

Which one of the following is considered a clear indication of senior management's commitment to risk management?

The willingness to allocate the necessary resources

For property, which one of the following causes of loss will most likely result in a total loss? a.

Theft 85.

Aligning risks with the organization's risk appetite defines: a.

Tolerable uncertainty 26.

Sean recently started a small consulting practice. Sean is the only employee of the business and the sole generator of revenue. Sean is very concerned that in the event that he becomes disabled due to an accident or disease there will be no more revenue coming into the business. Which one of the following goals best identify Sean's concerns? a.

Tolerable uncertainty and earnings stability 32.

The single largest impediment to a successful implementation of enterprise risk management program is: a.

Traditional organizational culture with entrenched risk silos 70.

One enterprise risk management (ERM) approach to categorizing risk involves dividing risks into four risk quadrants. The risks categorized as hazard risks are: a.

Traditionally managed by risk management professionals 44.

150. Economic capital models the potential variability in a firm's market assets and liabilities, taking into consideration all of the firm's risks. These risks are considered together to estimate at the firm-level the probability that a firm's liabilities may exceed assets by specified levels over a one-year period. This probability measure is based on a concept called

Value at risk

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: a.

Value at risk 145.

149. *The market value surplus of an insurer is equal to the fair value of assets minus the present value of liabilities plus the market value margin. The market value margin is

a. An additional payment in case the reserves are inadequate

148. *Market value surplus (MVS) of an insurer=

a. ~Fair value of assets-Fair value of liabilities

A significant difference between the Bassel I regulatory capital requirements and the Bassel II regulatory capital requirements is that Bassel II

a. ~Includes a capital requirement for operational risk that Basel 1 does not include

There are numerous advantages associated with economic capital analysis. One of these advantages is that

it focuses attention on the risks attention attached to each of an organization's activities

Economic capital is defined as

the amount of capital required to maintain solvency at a given risk tolerance level