RMI 301 Exam 2

Probability analysis is best suited for organizations that have A relatively small number of past losses Changing and complex business environments A substantial volume of data on past losses Unstable operations

A substantial volume of data on past losses

A major benefit of involving a special purpose vehicle (SPV) in a securitization transaction is that investors can decide whether to invest in the securities based on the Number of borrowers involved and their individual risk. Risk presented by the income-producing assets held as collateral by the SPV. Organization's balance sheets. Overall credit risk of the organization.

Risk presented by the income-producing assets held as collateral by the SPV.

A construction company based in the U.S. has building contracts in five different foreign nations. The construction company agreed to accept payment for its work in each country's currency. The risk of loss of value when these foreign payments are converted to U.S. dollars is called Exchange-rate risk. Liquidity risk. Pure risk. Credit risk.

Exchange-rate risk.

The weighted average of all of the possible outcomes of a probability distrubtion is the Dispersion Expected value Mode Median

Expected value

In using the coefficient of variation when comparing two distributions, if both distributions have the same mean, then the distribution with the larger standard deviation will have More skew Greater variability Less skew Less variability

Greater variability

Ag Products Company (APC) signed a contract to deliver 50,000 bags of its corn chips snack food to a supermarket chain is six months. The supermarket will pay APC $2.00 per bag of chips. APC will need 5,000 bushels of corn to produce the 50,000 bags of chips. It estimates the other production and shipping costs will total $62,500. Corn was selling at $5.50 per bushel when APC entered into the contract. At the time APC entered into the agreement, what was the expected net income from this deal, assuming APC does not use hedging? $27,500 $100,000 $10,000 $16,667

$10,000

Shelton Manufacturing is considering investing $400,000 in a new production line. The new equipment is expected to generate a savings of $100,000 per year for each of the next five years. Shelton's cost of capital is 7%. What is the net present value of the investment in the new production line? Disregard the effect of depreciation and taxes. $730 $83,440 $107,570 $10,020

$10,020

As part of a liability claim settlement, Nicole has been given the choice between an ordinary annuity that pays $14,200 per year for 10 years, or a single lump sum payment today. If Nicole believes that a reasonable rate of return is 6%, what is the present value of the annual annuity payments? $142,000 $133,962 $96,584 $104,513

$104,513

Hartsell Company's risk manager determined the premium for liability losses, when capped at $25,000, is $15,000. An insurer's increased limit factor table using 1.00 for $25,000 shows a factor of 1.80 for $100,000. If Hartsell Company wants to increase the limit from $25,000 to $100,000, how much additional premium will it have to pay? $16,000 $8,333 $12,000 $27,000

$12,000

Assuming an interest rate of 4%, the present value of $30,000 received in three years is $26,670. $27,750. $28,260. $28,860.

$26,670.

Joe wants to have $40,000 available to make the down payment on a house three years from now and has decided to set aside part of an inheritance he just received to achieve that goal. If Joe can earn 5% interest on a bank certificate of deposit, how much of the must he set aside today in order to have $40,000 three years from now? $34,554 $35,212 $33,888 $34,000

$34,554

The sum of all probabilities in a probability distribution must be 68.26 95.44 1.00 100.00

1.00

Carl is the risk manager of Benson Company. He obtained the following General Liability increased limit factors from Casualty Insurance Consulting Company: for a loss limit of $50,000 the increased limit factor is 1.00; for a loss limit of $100,000 the increased limit factor is 1.60; for a loss limit of $500,000 the increased limit factor is 2.10; and for a loss limit of $1,000,000 the increased limit factor is 2.40. What is the increased limit factor from $100,000 to $1,000,000? 0.24 8.06 6.10 1.50

1.50

Which one of the following statements is true regarding key risk indicators (KRI)? A KRI is an effective predictor of external event risk. A KRI must be leading, rather than lagging, to be effective. A KRI is the event or circumstance that directly led to a loss. A KRI is a financial metric used to help define potential losses.

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

Which one of the following statements is true concerning robotic process automation (RPA)? RPA is more focused on the range of tasks that can be performed by a robot rather than the process of completing a task. When RPA is employed, it always involved the use of robots. RPA cannot be used as part of business process management. Although RPA can help control some organizational risks, use of RPA can create other risks.

Although RPA can help control some organizational risks, use of RPA can create other risks.

Which one of the following statements is true regarding an effective risk reporting system? An effective reporting system allows senior management to receive individual reports from each department. Most organizations rely on reporting systems that provides quantitative data only. An effective reporting system provides efficient information flow up and down the lines of authority. An effective reporting system should only include internal sources of information.

An effective reporting system provides efficient information flow up and down the lines of authority.

During which one of the following stages of the strategic management process would an organization use methods such as Porter's Five Forces Analysis and PESTLE Analysis? Developing Goals Formulating Strategies Analyzing Environments Evaluating Strategies

Analyzing Environments

To project the value of future accidental losses, risk managers obtain data on past losses, limit individual large losses, and then Apply trend and development factors to the data. Add the losses in prior years together and divide by the number of years to estimate next year's losses. Discount the past loss values back to the base year. Assume future experience will be identical to past experience.

Apply trend and development factors to the data.

The board of directors of ABC Insurance Company wants assurance that the company's recently-instituted "commitment to risk management" has been communicated to and accepted by all company employees. Which one of the following would be the best method to determine if employees had been informed of the commitment to risk management and had accepted it? Ask senior management to prepare a report on the subject. Use a measure such as sales per employee or net income per employee to track performance. Ask the internal audit department to administer a risk management questionnaire to employees. Check employee absenteeism before and after the policy was instituted.

Ask the internal audit department to administer a risk management questionnaire to employees.

The basic accounting equation on which the balance sheet is structured is Net Worth = Liabilities + Assets Assets = Liabilities + Net Worth Liabilities = Assets + Net Worth Assets = Liabilities - Net Worth

Assets = Liabilities + Net Worth

The balance sheet provides a snapshot of an organization's financial condition At a given point in time. For at least two points in time for comparison purposes. Over one 12 month period. At the start and end of a business day.

At a given point in time.

One financial risk for an insurer is that the insured will not pay all of the premiums when the premiums are due. This type of risk is called Price risk. Credit risk. Underwriting risk. Interest rate risk.

Credit risk

An important liquidity measure for a business is its working capital. Working capital is equal to Total assets minus total liabilities. Owners' equity minus current liabilities. Current assets minus current liabilities. Total assets minus current assets.

Current assets minus current liabilities.

In capital budgeting decisions, the main noncash item affecting income taxes is The initial investment. The minimum acceptable rate of return. Depreciation of long term assets. Opportunity costs of other investments..

Depreciation of long term assets.

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

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

Estimates whose accuracy depends on the size and representative nature of the samples being studied are Conditional probabilities Theoretical probabilities Experimental probabilities Empirical probabilities

Empirical probabilities

Like most insurance companies, the majority of Insurance Company's portfolio is invested in bonds. If interest rates increase, the value of the bonds in the portfolio will decrease. This risk to Insurance Company is called Interest rate risk. Price risk. Liquidity risk. Credit risk.

Interest rate risk.

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

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

The four SWOT headings are strengths, weaknesses, threats and Priorities. Markets. Ideas. Opportunities.

Opportunities

Risk indicators such as experience and authority levels apply to which one of the following operational risk classes? External events Process Systems People

People

Which one of the following analysis methods concentrates on an organization's competitive environment? Porter's Five Forces analysis PESTLE analysis SWOT analysis Scenario analysis

Porter's Five Forces analysis

One category of operational risk includes procedures and practices organizations use to conduct their business activities. This category is Process risk Technological risk Systems risk Business complexity risk

Process risk

Chuck is Vice President of Claims for ABC Insurance Company. The company has 37 adjusters in the field, and needs to hire four new adjusters. Chuck is curious about the relationship between prior experience of the adjuster and policyowner complaints. He collected data on the number of complaints for each adjuster on staff over time. Then he used a statistical technique to analyze the relationship between adjuster experience and complaints, and the trend of the relationship over time. The statistical analysis confirmed that there were significantly fewer complaints with more experiences adjusters, and that the relationship grew stronger with more years of experience. The teterm-0chnique Chuck used to relate indicators to outcomes is called Central tendency analysis Analysis of variance. SWOT analysis Regression analysis

Regression Analysis

Strategic risk can be created and affected by external factors or internal factors. Which one of the following is considered an internal factor? Changes in labor market Resource allocation Competitive pressures Changes in regulations

Resource allocation

When assessing strategic risk, which one of the following represents the amount of risk an organization is willing to take on in order to achieve an anticipated result or return? Risk-adjusted return on capital Risk appetite Risk threshold Economic capital

Risk appetite

The level of confidence an organization places in the organization's risk management culture, practices, and procedures is called Risk assurance. Tolerable uncertainty. Probable maximum loss. Risk tolerance.

Risk assurance.

Which one of the following is the most intangible and abstract of the four risk quadrants? Operational risk Financial risk Strategic risk Hazard risk

Strategic risk

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

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

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

The variable being forecast varies predictably with another variable.

Why is it common for risk managers to obtain increased limit factors from an outside source, such as an insurance advisory group or a brokerage, rather than calculating the factors using the company's own data? There usually is not enough company data to calculate statistically credible factors. Using company specific data will bias the results, so it's better to use industry averages. The calculation is complex and requires quantitative expertise many risk managers do not possess. State regulatory authorities require that an actuary certify the factors, and most companies do not have an in-house actuary.

There usually is not enough company data to calculate statistically credible factors.

A facility established for the purpose of purchasing income-producing assets from an organization, holding title to them and then using those assets to collateralize securities that will be sold to investors is A forward contract. A catastrophe bond. An insurance derivative. A special purpose vehicle.

A special purpose vehicle.

ABC Insurance Company monitors key indicators of underwriting effectiveness. Some indicators they monitor include: percentage of business quoted that was written, applications processing time, premium volume handled by underwriters, skill level of underwriters, and benchmarking between different underwriting offices. The indicators of underwriting performance ABC Insurance Company uses are called System indicators Exposure indicators Process indicators Control indicators

Control indicators

Jones, Inc. buys grain from local farmers and re-sells the grain to a number of customers. Jones, Inc. has been approached by Snack Cracker Company. Snack Cracker would like to purchase wheat and corn from Jones, Inc. to use in the crackers it produces. Snack Cracker would like to pay for the grain within 30 days of the date the grain is delivered. As Snack Cracker is a new customer, Jones, Inc. asked to review its financial statements. Which balance sheet ratio would best assist Jones, Inc. in determining if Snack Cracker can pay for the grain within 30 days of the sale? Debt-to-assets ratio Equity-to-assets ratio Current ratio Debt-to-equity ratio

Current ratio

Percentages applied to past aggregate losses for each year in order to add an amount for the possibility of both late-reported claims and a future increase in the incurred amount for reported claims are called Discount factors. Trend factors. Loss development factors. Increased limits factors.

Loss development factors.

Which one of the following statements is correct with respect to risk tolerance? Risk tolerance is stated in both quantitative and qualitative terms. Risk tolerance levels can have high-end thresholds, low-end thresholds, or both. An organization's risk tolerance is typically unrelated to its risk appetite. A zero-risk tolerance level will typically result in the best risk-based decisions.

Risk tolerance levels can have high-end thresholds, low-end thresholds, or both.

Which one of the following statements is true regarding the strategic management process? The strategic management process focuses on the internal environment of the organization. The strategic management process aligns all of an organization's strategies and activities to enable it to meet its short-term goals. The strategic management process is the responsibility of an organization's board of directors. The strategic management process can be applied to any type of organization, including business, not-for-profit organizations, and government entities.

The strategic management process can be applied to any type of organization, including business, not-for-profit organizations, and government entities.

Which one of the following is the goal with strategic risk? The goal is to remain solvent and cover the risk retained by the organization. The goal is to make sure that products and processes are done right. The goal is to use information about strategic risks to make informed decisions that optimize the risk-reward ratio. The goal is to use information about strategic risks to eliminate negative risks and/or their consequences.

The goal is to use information about strategic risks to make informed decisions that optimize the risk-reward ratio.

An adjustment to loss data for a change in general economic conditions, such as inflation, is a Loss development factor. Loss triangulation factor. Trend factor. Ultimate loss development factor.

Trend factor

Which one of the following statements is true with regard to a manufacturing company using call options to hedge the cost of a raw material? A call option gives the owner the right to sell a specified quantity of the underlying commodity at a specified price during a specified period. Using call options may actually reduce the profitability of a transaction. Hedging using call options increases the variability of the company's cash flows. For a call option to have any value, the strike (exercise) price of the option must be lower than the spot (market) price, no matter the time to maturity of the option.

Using call options may actually reduce the profitability of a transaction.

For those organizations that use the internal records of their own past losses to estimate future losses, Organizational diversification can make such estimates less accurate. Too many exposure units can make such estimates less accurate. The law of large numbers makes such estimates more accurate the smaller the organization is. The law of large numbers makes such estimates more accurate the larger the organization is.

The law of large numbers makes such estimates more accurate the larger the organization is.

Which one of the following statements is true regarding a generic model of a securitization? The Special Purpose Vehicle (SPV) uses income-producing assets from investors to fund debt from the organization. The organization sells income-producing assets to an SPV in exchange for cash. The SPV sells income-producing assets to the organization in exchange for securities purchased by investors. Investors purchase securities from the organization that are then used as a guarantee for the purchase of income-producing assets.

The organization sells income-producing assets to an SPV in exchange for cash.

A retail store has five employees with no workers compensation losses for the last two years. Which one of the following is true regarding estimating the loss probability for the coming period? The store has operational diversification but has too few a number of loss exposure units to estimate the loss probability. There is no risk of workers compensation injuries for the coming period. The store has insufficient loss experience to meaningfully estimate the loss probability. Once the store has three years of loss experience, internal records will be credible to estimate the loss probability.

The store has insufficient loss experience to meaningfully estimate the loss probability.