Chapter 1 quiz by Kat

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-out exposure but is also aware that asbestos may have resulted in unidentified harm. In the "quadrants of risk," Phil's concern about the asbestos most likely falls into which one of the following quadrants of risk? Choose one answer. A. Hazard risks B. Operational risks C. Financial risks D. Strategic risks

A. Hazard risks

JNL Construction is a general contractor. As the risk management professional for JNL, Marie should be aware of the company's contractual obligations, as well as the contractual obligations that others owe JNL. This knowledge is necessary for Marie to meet which one of the following pre-loss risk management goals? Choose one answer. A. Legality B. Social responsibility C. Tolerable uncertainty D. Continuity of operations

A. Legality Correct. This knowledge would help Marie meet legality.

In the context of risk, the chance of being injured while driving to and from work, loading a truck at work, moving furniture at home, or falling in an icy parking lot at the mall are all examples of Choose one answer. A. Possibilities. B. Uncertainties. C. Probabilities. D. Losses.

A. Possibilities. Correct. In the context of risk, the chance of being injured while driving to and from work, loading a truck at work, moving furniture at home, or falling in an icy parking lot at the mall are all examples of possibilities.

Probabilities are stated as a decimal figure, a percentage, or a Choose one answer. A. Credibility factor. B. Dollar amount. C. Fraction. D. Stated constant.

C. Fraction. Correct. Probabilities are stated as a decimal figure, a percentage, or a fraction.

After identifying and analyzing loss exposures and evaluating and selecting the appropriate risk management techniques, the next step in the risk management process is to Choose one answer. A. Monitor the results. B. Revise the risk management program. C. Implement the selected techniques. D. Decide on risk financing techniques.

C. Implement the selected techniques. Correct. After identifying and analyzing loss exposures and evaluating and selecting the appropriate risk management techniques, the next step in the risk management process is to implement the selected techniques.

Which one of the following describes how an effective risk management program should support an organization's pre-loss operational goals? Choose one answer. A. It should ensure that risk management costs are kept to a minimum. B. It should eliminate uncertainty by identifying and managing loss exposures. C. It should help ensure that the organization's legal obligations are satisfied. D. It should ensure that no conflicts exist among the pre-loss goals.

C. It should help ensure that the organization's legal obligations are satisfied

As part of its risk management program, a vending company installed a new top of the line security system with an expectation of fewer thefts and Choose one answer. A. Higher expected losses. B. Increased anxiety. C. Less residual uncertainty. D. Increased residual uncertainty.

C. Less residual uncertainty. Correct. Less residual uncertainty.

Risk management program goals are typically divided into two categories: pre-loss goals and post-loss goals. Which one of the following describes one of these categories of goals? Choose one answer. A. Pre-loss goals are risk management goals that allow the organization to prepare for future losses. B. Pre-loss goals include profitability, earnings stability, and loss prevention. C. Post-loss goals broadly describe the degree of recovery that an organization will strive to reach following a loss. D. Post-loss goals include immediate restoration of operations, tolerable uncertainty, and loss mitigation.

C. Post-loss goals broadly describe the degree of recovery that an organization will strive to reach following a loss.

While there are many causes of net income losses, net income losses are usually associated with Choose one answer. A. Loss of goodwill. B. Liability losses. C. Property losses. D. Missed opportunities.

C. Property losses.

Which one of the following statements is true regarding risk management efforts on the part of individuals, organizations, and society in general? Choose one answer. A. Organizations tend to exhibit a greater degree of risk aversion than do individuals. B. Risk management tends to increase the deterrence effect of risk in organizations. C. Risk management makes those who own or run an organization more willing to undertake risky activities. D. The benefits that risk management efforts provide to individuals and organizations are not felt by society in general.

C. Risk management makes those who own or run an organization more willing to undertake risky activities.

Which one of the following is a type of risk that enterprise risk management (ERM) would treat but that traditional risk management would not? Choose one answer. A. Risk of property damage to the organization's assets B. Risk of liability for damage or injury to a third party C. Risk of changes in commodity prices, such as fuel or raw materials D. Risk of business interruption due to natural hazards such as flood or earthquake

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

Which one of the following is a risk that enterprise risk management (ERM) would treat but that traditional risk management would not? Choose one answer. A. Risk of property damage to the organization's assets B. Risk of liability for damage or injury to a third party C. Risk of changes in economic conditions, such as growth or recession D. Risk of business interruption due to natural hazards such as flood or earthquake

C. Risk of changes in economic conditions, such as growth or recession Correct. A risk that ERM would treat but that traditional risk management would not is risk of changes in economic conditions, such as growth or recession.

Risk can be classified as subjective or objective. Which one of the following statements is correct with respect to these risk classifications? Choose one answer. A. Subjective risk is risk associated with individuals; objective risk is risk associated with objects or things. B. Risk managers focus on objective risk and attempt to avoid allowing subjective risk to affect their decisions. C. Subjective risk can exist even where objective risk does not. D. Individuals' subjective perception of risk in a given set of circumstances is typically much higher than the objective risk.

C. Subjective risk can exist even where objective risk does not

For insurance and traditional risk management purposes, loss exposures are typically divided into four types. Which one of the following lists those four types? Choose one answer. A. Property, liability, personnel, and net income B. Environmental, professional, property, and liability C. Property, employers liability, net income, and environmental D. Property, workers compensation, personnel, and net income

A. Property, liability, personnel, and net income Correct. For insurance and traditional risk management purposes, loss exposures are typically divided into the following four types: property, liability, personnel, and net income.

The statement "There is a 5 percent chance that John will be injured in an automobile accident while driving to work tomorrow." is an example of Choose one answer. A. Quantifying risk. B. Verifying risk. C. Quantifying loss exposures. D. Indentifying hazards.

A. Quantifying risk. Correct. The statement "There is a 5 percent chance that John will be injured in an automobile accident while driving to work tomorrow." is an example of quantifying risk.

Which one of the following is a main theoretical concept that explains how traditional risk management works? Choose one answer. A. Silo approach B. Correlation C. Portfolio theory D. Interdependency

A. Silo approach Correct. The silo approach is the main theoretical concept that explains how traditional risk management works.

Which one of the following is both a pre-loss and a post-loss risk management goal for many organizations? Choose one answer. A. Social responsibility B. Tolerable uncertainty C. Legality D. Survival

A. Social responsibility Correct. Social responsibility is both a pre-loss and a post-loss risk management goal for many organizations.

Which one of the following costs is part of the overall financial consequences of risk? Choose one answer. A. The cost of the value lost due to events that caused a loss B. The cost of purchasing an asset C. The cost of benchmarking surveys D. The cost of losses reimbursed by insurance

A. The cost of the value lost due to events that caused a loss

The single largest impediment to successful implementation of an enterprise risk management (ERM) program is Choose one answer. A. Traditional organizational culture with entrenched risk silos. B. Lack of required skills to effectively implement an ERM program. C. Opposition from stakeholders—employees, stockholders, customers, and suppliers. D. Lack of vision by the management team that leads to under-performance of the ERM plan and early termination.

A. Traditional organizational culture with entrenched risk silos.

Risk is a term that is regularly used and that is generally understood in context. As used in this discussion, which one of the following is one of the two elements within the definition of risk? Choose one answer. A. Uncertainty of outcome B. Likelihood of injury or damage to property C. Probability of financial loss D. Opportunity for profit

A. Uncertainty of outcome Correct. Uncertainty of outcome is one of the two elements within the definition of risk as used in this discussion.

Two steps of the risk management process, when combined, constitute the process of assessing loss exposures. For this reason, they are probably the two most important steps in the process. These two steps are identifying loss exposures and Choose one answer. A. Selecting the appropriate risk management techniques. B. Analyzing loss exposures. C. Examining feasibility of risk management techniques. D. Implementing selected risk management techniques.

B. Analyzing loss exposures. Correct. The two most important steps in the risk management process are identifying loss exposures and analyzing loss exposures.

A risk management program must be monitored and periodically revised, and that revision involves four steps. Which one of the following is one of those four steps? Choose one answer. A. Establish results-based rather than activity-based standards of acceptable performance. B. Compare actual results with the established performance standards. C. Reduce any performance standards that have not been achieved by the actual results. D. Return to the first step in the risk management process to identify new loss exposures.

B. Compare actual results with the established performance standards. Correct. One of the four steps is to compare actual results with the established performance standards.

Risk can be classified as diversifiable or nondiversifiable. Which one of the following statements is true with respect to this type of risk classification? Choose one answer. A. Inflation, unemployment, and natural disasters, such as hurricanes, are examples of diversifiable risk. B. Diversifiable risks tend not to be correlated so they can be managed through diversification or spread of risk. C. The distinction between diversifiable and nondiversifiable risks is clear; risks cannot fall under both classifications simultaneously. D. Private insurance tends to concentrate on nondiversifiable risks; government insurance is often suitable for diversifiable risks.

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

Dave owns a computer store. He stores backup media copies of confidential records off site in case there is a fire at the computer store. The risk control technique Dave is using to protect the confidential records is Choose one answer. A. Diversification. B. Duplication. C. Avoidance. D. Separation.

B. Duplication. Correct. The risk control technique used by Dave is that of duplication.

When it comes to providing management with the desired level of assurance, with which of the following does tolerable uncertainty conflict? Choose one answer. A. Legality B. Economy of operations C. Social responsibility D. Survival

B. Economy of operations Correct. When it comes to providing management with a desired level of assurance, the goal of tolerable uncertainty might conflict with economy of operations

To understand risk, one needs to know the probability of an outcome or event occurring. Which one of the following statements is correct with respect to probability? Choose one answer. A. It is typically expressed verbally rather than numerically. B. It can be used to decide which activities to undertake. C. It verifies that risk is present, but does not quantify it. D. It identifies what can be lost when a negative outcome occurs.

B. It can be used to decide which activities to undertake. Correct. It can be used to decide which activities to undertake.

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 Choose one answer. A. Moral hazard. B. Morale hazard. C. Physical hazard. D. Legal hazard.

B. Morale hazard. Correct. Laura's behavior is an example of a morale hazard.

Which one of the following statements is true regarding enterprise risk management (ERM)? Choose one answer. A. ERM is concerned with an organization's pure risk, primarily hazard risk. B. The ERM framework encompasses all stakeholders in the organization. C. ERM requires less communication than traditional risk management. D. In ERM, the risk management function is the responsibility of the safety manager.

B. The ERM framework encompasses all stakeholders in the organization

Which one of the following statements is true regarding risk management techniques? Choose one answer. A. Data based on objective risk factors are usually the only criteria considered in determining appropriate risk management techniques. B. The risk management techniques selected by for-profit organizations should be both effective in meeting the organizations' goals and economical. C. In support of the goal of economy of operations, the risk management techniques selected by most for-profit organizations should be the least expensive ones. D. Nonfinancial considerations are usually disregarded in selecting risk management techniques because they cannot be factored into a cost/benefit analysis.

B. The risk management techniques selected by for-profit organizations should be both effective in meeting the organizations' goals and economical.

Which one of the following financial consequences of loss can be established with a high degree of certainty fairly soon after the loss occurs? Choose one answer. A. The value of a pollution loss B. The value of a building that has been damaged by fire C. The value of business lost while the building damaged by fire is being restored D. The value of liability claims related to a defective product

B. The value of a building that has been damaged by fire Correct. The value of a building that has been damaged by fire can be established with a high degree of certainty fairly soon after the loss occurs.

Buildings, investments, patents, and human resources are all examples of Choose one answer. A. Causes of loss or perils. B. Financial consequences of loss. C. Assets exposed to loss. D. Tangible and intangible hazards.

C. Assets exposed to loss. Correct. Buildings, investments, patents, and human resources are all examples of assets exposed to loss.

Classifying the various types of risk can help in assessing, controlling, and financing risk as part of the risk management process. Which one of the following statements is true regarding the typical classifications of risk? Choose one answer. A. Classifications of risk are mutually exclusive. B. All classification pairs can not be applied to any given risk. C. Classifications of risk can help with controlling and financing risk. D. Classifications of risk is not helpful with assessing risk but can assist with the administrative function of risk management.

C. Classifications or risk can help with controlling and financing risk.

For public entities such as cities, counties and public utilities, which one of the following is normally the most important post-loss risk management goal? Choose one answer. A. Growth B. Profitability C. Continuity of operations D. Earnings stability

C. Continuity of operations Correct. Continuity of operations is normally the most important post-loss risk management goal.

Organizations find it difficult to establish a benchmark against which the performance of their risk management program can be assessed because it is difficult to assign a specific value to the Choose one answer. A. Cost of implementing and administering risk management. B. Cost of losses not reimbursed by insurance. C. Cost of residual uncertainty. D. Cost of measures to prevent or reduce the size of potential losses.

C. Cost of residual uncertainty. Correct. Organizations find it difficult to establish a benchmark against which the performance of their risk management program can be assessed because it is difficult to assign a specific value to the cost of residual uncertainty.

Which one of the following statements is accurate regarding pure and speculative risks? Choose one answer. A. A pure risk is a chance of loss or no loss, or a chance of gain. B. Pure risks may sometimes be desirable. C. Every business venture involves speculative risks. D. Financial investments typically involve pure risk.

C. Every business venture involves speculative risks. Correct. Every business venture involves speculative risks.

One of the elements of risk is uncertainty. Which one of the following best describes the type of uncertainty that risk involves? Choose one answer. A. Uncertainty as to how to manage potential losses B. Uncertainty as to whether a negative outcome is possible C. Uncertainty as to the type and timing of the outcome D. Uncertainty as to whether insurance is available

C. Uncertainty as to the type and timing of the outcome Correct. Uncertainty as to the type and timing of the outcome best describes the type of uncertainty that risk involves.

Which one of the following is true regarding organizational post-loss goals? Choose one answer. A. The most basic post-loss goal is survival, which means returning the organization to the condition that existed before the loss. B. Social responsibility is a post-loss goal that is unique to not-for-profit and public entities. C. With a post-loss goal of profitability, senior management may establish a minimum amount of profit that no loss can be allowed to reduce. D. With a post lost goal of earnings stability, the risk management professional will seek to raise retention levels to minimize the amount spent on risk transfer mechanisms.

C. With a post-loss goal of profitability, senior management may establish a minimum amount of profit that no loss can be allowed to reduce. Correct. With a post-loss goal of profitability, senior management may establish a minimum amount of profit that no loss can be allowed to reduce.

A risk management plan that considers all of the risks that an organization faces, including operational, financial, and strategic risks, is called Choose one answer. A. A hazard risk management plan. B. An open-perils risk management plan. C. A protected cell risk management plan. D. An enterprise risk management plan.

D. An enterprise risk management plan. Correct. A risk management plan that considers all of these risks is an enterprise risk management plan.

Risk can be classified as pure or speculative. Which one of the following is the best example of a speculative risk? Choose one answer. A. Buying a new personal vehicle B. Purchasing an insurance policy C. Acquiring a new television D. Investing in shares of stock

D. Investing in shares of stock Correct. The best example of a speculative risk is investing in shares of stock.

Driving carelessly or failing to lock an unattended building are examples of Choose one answer. A. Moral hazard. B. Physical hazard. C. Legal hazard. D. Morale hazard.

D. Morale hazard. Correct. Driving carelessly or failing to lock an unattended building are examples of morale hazard.

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 would be classified as a(n) Choose one answer. A. Hazard risk. B. Operational risk. C. Financial risk. D. Strategic risk.

D. Strategic risk. Correct. Categorized according to the quadrants of risk, this exposure to loss would be classified as a strategic risk.

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, this risk of increased competition falls into the category of Choose one answer. A. Hazard risk. B. Operational risk. C. Financial risk. D. Strategic risk.

D. Strategic risk. Correct. This risk of increased competition falls into the category of strategic risk.

Risk involves the possibility of a negative outcome. Possibility means Choose one answer. A. The likelihood of an event occurring. B. That an outcome is unavoidable. C. An identified and predictable outcome. D. That an outcome may or may not occur.

D. That an outcome may or may not occur. Correct. Possibility means that an outcome may or may not occur.

Which one of the following statements is true regarding the financial consequences of loss? Choose one answer. A. The financial consequences of any loss can be established immediately after the loss occurs. B. The financial consequences of a loss are independent of any hazards that may have contributed to the loss. C. The financial consequences of future losses cannot be predicted with any degree of certainty. D. The financial consequences depend on the type of loss exposure, the cause of loss, and the loss frequency and severity.

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

Sally and her husband Bill own a saddle shop that has been in Sally's family for generations. Because of the sentimental value of the shop, they have invested a great deal in loss-prevention devices and safety features to ensure the survival of the business. This tendency to over-invest in loss-prevention measures creates the risk that Choose one answer. A. Too much emphasis is being placed on maximum earnings in any one period rather than stability of earnings over time. B. Risks that should be transferred are being retained. C. The risk management techniques selected are not the best ones for the saddle shop. D. The financial value of the saddle shop is not being maximized.

D. The financial value of the saddle shop is not being maximized.

Three main theoretical concepts explain how enterprise risk management (ERM) works. One theoretical concept considers not only the combination of individual risks but also their interactions. This theoretical concept is Choose one answer. A. Correlation. B. Skewness. C. The interdependency theory. D. The portfolio theory.

D. The portfolio theory. Correct. The portfolio theory considers how the individual risks in the portfolio interact with each other.

The focus of risk quadrants is different from the focus of risk classifications. While the classifications of risk focus on some aspect of the risk itself, the four quadrants of risk focus on Choose one answer. A. Pure and speculative risks. B. Subjective and objective risks. C. The determination of whether the risk is diversifiable. D. The source of risk and who has traditionally managed it.

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

Which one of the following is usually the single largest impediment to successful implementation of enterprise risk management (ERM)? Choose one answer. A. The financial expense B. The risk management information system C. The legal and regulatory requirements D. The traditional organizational culture

D. The traditional organizational culture Correct. The traditional organizational culture is usually the single largest impediment to successful implementation of ERM.