FIN314 Test #1

Quadrants of Risk

Hazard (pure), Operational, Financial, Strategic

Correlation

A measure of the relationship between two variables

Risk Tolerance

Amount of uncertainty an organization is prepared to accept for a specific initiative

consequences

occurrence that could positively/negatively effect the company

Risk Management Benefits for an Organization and the Economy

(Organization) •Reduce the Cost of Hazard Risk •Reduce the Deterrence Effect of Hazard Risks •Reduce Downside Risk •Manage the Downside of Risk •Take Intelligent Risks •Maximize Profitability (Economy) •Reduced Waste of Resources •Improved Allocation of Productive Resources •Reduced Systemic Risk

Total Cost of Risk (TCOR)

*Maximize shareholder value by minimizing the TCOR* The sum of all costs and expenses associated with risk and the management of risk within an organization

Pure vs. Speculative Risk

-A pure risk is a situation in which there are only the possibilities of loss or no loss (earthquake) -A speculative risk is a situation in which either profit or loss is possible (gambling)

TCOR components

-Cost of Losses (direct and indirect) -Cost of Loss Control -Cost of Loss Financing (insurance or non-insurance) -Cost of Risk Management Administration

Basic Risk Measures

-Exposure -Volatility -Likelihood -Consequences -Time Horizon -Correlation

Risk Management Goals

-Tolerate Uncertainty -Legal and Regulatory Compliance -Survival -Business Continuity -Profitability and Growth/ Earning Stability -Social Responsibility

Goals of Risk Management

-identify -inform -treat

Risk Appetite

The total exposed amount that an organization wishes to undertake on the basis of risk-return trade-offs

Which one of the following risk identification techniques can be applied if the problem is of low complexity and there is no need for quantitative output? a) Risk analysis questionnaires. b) Failure mode and effects analysis. c) Brainstorming. d) Scenario analysis.

a) Risk analysis questionnaires.

The most direct driving route between Bailey's home and the office where she works would require her to drive through a high-crime area. In the high-crime area, car jackings and drive-by shootings are common. Although it increases her travel time by 15 to 20 minutes in each direction, Bailey takes a longer route so that she does not have to drive through the high-crime area. Bailey is dealing with the risk of being injured while driving through the high-crime area through a) Retention. b) Avoidance. c) Loss control. d) Transfer.

b) Avoidance.

Cotton Products Company manufactures cotton clothing, towels, sheets, and other cotton products. All production takes place at one large multi-acre production facility. The risk manager of Cotton Products Company called a meeting attended by her staff, the plant foreman, the plant safety engineer, and the head of operations. She told the group that she wanted to analyze one problem--the top event--a catastrophic fire at the production facility. The group discussed all the causes of failure and factors that could contribute to the top event. The causes of the "top event" were listed, and methods of reducing the likelihood and consequences of the event were examined. The technique the risk manager employed is called a) SWOT analysis. b) Fault tree analysis (FTA). c) Failure mode and effects analysis (FMEA). d) Scenario analysis.

b) Fault tree analysis (FTA).

Risk management reviews the cost of risk associated with protecting cash flows, assets, and personnel. Which one of the following statements best describes the key components of an organization's cost of risk? a) Risk hazards, cost of perils insured against, premium, and loss control expenses b) Risk management department costs, retained losses, premiums, and risk control costs c) Operational, administrative, and risk control costs d) Hazard risk and operational costs

b) Risk management department costs, retained losses, premiums, and risk control costs

As part of its risk assessment process, a company's risk management department performed a SWOT (strengths, weaknesses, opportunities, threats) analysis. SWOT analysis is a form of which one of the following types of risk identification techniques? a) Future states analysis b) Strategy analysis c) Cause and effect analysis d) Failure analysis

b) Strategy analysis

A risk management plan that considers all of the risks that an organization faces, including operational, financial, and strategic risks, is called a) A protected cell risk management plan. b) An open-perils risk management plan. c) An enterprise risk management plan. d) A hazard risk management plan.

c) An enterprise risk management plan.

A1 Architectural Design relies on its historical files and blueprints. The partners of the firm are discussing risk control measures that can be implemented to provide protection against property-related losses. Which one of the following would likely offer the best protection for this exposure? a) Avoidance b) Diversification c) Duplication d) Separation

c) Duplication

Which one of the following provides a measure of the maximum potential damage associated with an occurrence? a) Duration b) Underwriting risk c) Exposure d) Maximum probable loss

c) Exposure

Which one of the following types of risks can result in losses but not in any gains? a) Speculative risks b) Strategic risks c) Hazard risks d) Financial risks

c) Hazard risks

The risk that remains after all of the risk treatment methods have been applied is called a) Diversifiable risk. b) Pure risk. c) Residual risk. d) Speculative risk.

c) Residual risk.

Jason Davies is the new risk manager of Precious Metals Mining Company. Jason decided to take a "fresh" look at all the risks Precious Metals faces. He considered the causes and sources of the risks, as well as the positive and negative consequences, and the likelihood of the occurrence of the consequences. Jason conducted a.. a) Risk treatment. b) Risk monitoring. c) Risk analysis. d) Risk identification.

c) Risk analysis.

Which one of the following statements is true regarding the evolution of risk and risk management? a) Risk management now involves only those areas where the organization has some degree of control over the outcome. b) The definitions of risk and risk management have become considerably more focused over the years. c) The definition of risk has evolved to include positive as well as negative attributes. d) Risk management is increasingly being applied to the risks associated with accidental losses.

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

Which one of the following is a speculative risk? a) The risk of premature death b) The risk of insufficient retirement income c) The risk of a wager at a casino d) The risk of being sued for bodily injury

c) The risk of a wager at a casino

Risk Management Process

process that provides all levels of management with a picture of the risks affecting the organization so that the organization can manage the risk and meet objectives.

Which of the following risk management program goals is an essential goal for all public entities? a) Earning stability b) Profit c) Growth d) Continuity of operations

d) Continuity of operations

A risk control technique that reduces the severity of a particular loss is a) Diversification. b) Duplication. c) Loss prevention. d) Loss reduction.

d) Loss reduction.

Risk management programs should a) Be an autonomous part of the organization. b) Incur substantial costs for slight benefits. c) Not use benchmarking to compare costs. d) Operate economically and efficiently.

d) Operate economically and efficiently.

Insurance deals primarily with a) Subjective risks. b) Speculative risks. c) Strategic risks. d) Pure risks.

d) Pure risks.

The process of making and implementing decisions that enable an organization to optimize its level of risk is called a)Insurance management. b)Financial management. c)Strategic management. d)Risk management.

d) Risk management.

Cold Coolers, Inc., has its main warehouse in St. Louis. It also stores inventory in two warehouses in other cities to reduce the distance between their warehouses and retail locations. Cold Coolers is using which one of the following risk management techniques? a) Risk transfer b) Duplication c) Diversification d) Separation

d) Separation

Which one of the following is true regarding risks? a)Holistic risk management deals only with familiar risks. b)Positive risks need not be managed. c)The number and interaction of risks is decreasing. d)The inability to easily distribute products is an operational risk.

d)The inability to easily distribute products is an operational risk.

Volatility

the amount/how things fluctuate (ex. rush hour, inventory)

Time Horizon

the estimates duration of a plan (longer horizon=more risk)

likelihood

the probability that a risk will happen

exposure

things that are exposed to risk (ex. cars, land)

The need for Enterprise Risk Management

•Changes in technology, globalization, and finance. •A Holistic Approach views all of the risks of the company and the way that they could potentially interconnect

Risk Management Objectives

•Set specifically by an organization •Should align risk management objectives with overall objectives •Reflect the organizations risk appetite •Reflect the organization's internal and external context