ARM 401 Practice Exam

Which one of the following statements about root cause analysis (RCA) is true?

A root cause must produce effective recommendations for prevention of future accidents.

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 firewall of the electronic database and gain access to customer account data. This operational risk for Sixth National Bank is

A systems risk

The predictive approach to data-driven decision making would be most appropriate for which one of the following situations?

A transportation company is looking for a way to optimize routes and improve fuel efficiency.

As supply chains extend throughout the world, blockchain-empowered smart contracts allow financial transactions to occur without the need for

A trusted third party.

Degree, closeness, and betweeness all fall into which one of the following categories?

Centrality Measures

Which one of the following occurs when individuals, departments, or teams from different areas work together to accomplish a shared organizational goal?

Collaboration

Timber Company has sold lumber and wooden poles for many years. The company is considering expanding into plywood production by building a plywood manufacturing facility. As this is a major decision, the company gathered data on the following variables: labor costs, cost of raw materials (wood, glue, etc.), energy costs, sales price (dollars per square foot), and estimated sales volume. A probability distribution for each of these variables was created. Then a computer was programmed to select a value from each probability distribution and to calculate the net income before taxes. The computer was programmed to repeat the calculation 250,000 times, and to create a probability distribution of the outcomes. The results showed an expected value of $2.35 million in annual net income before taxes. Eighty-two percent of the outcomes were positive net income before taxes. The type of analysis that Timber Company performed is called

Computer simulation.

A phase in the life of a system when the basic purpose and preliminary design of the system are formulated is the

Conceptual phase

The initial phase in the life cycle in any safety system is the

Conceptual phase.

A financial analyst wants to evaluate the effect that a predicted increase in the cost of steel will have on the net income of East Side Manufacturing. Which one of the following measurement techniques should the analyst use?

Earnings at risk

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.

Root cause analysis (RCA) encompasses a variety of tools, philosophies, and processes. There are several broadly defined RCA approaches, according to their basic approach or field of origin. Which one of the following approaches to RCA evolved from quality control procedures for industrial manufacturing?

Production-based RCA

A risk management professional should ensure that an organizational risk register has which one of the following characteristics?

Provides interactive use for risk owners

directors and officers of a corporation have fiduciary duties, which include the duty of being

Loyal.

Which one of the following is a technique used to provide a visual perspective of an organization's risks and to prioritize those risks?

Risk mapping

Risk maps differ from other risk assessment tools and techniques in which one of the following ways?

Risk maps identify, prioritize, and quantify risks in a two-dimensional pictorial that illustrates frequency and severity on vertical and horizontal axes.

Northeast Urban Properties owns and operates office buildings in New York, Boston, and Philadelphia. The risk manager decided to examine the impact of potential terrorist attacks on each building. For example, for the Philadelphia building, the risk manager examined attacks at three levels: scare (e.g. suspicious package), minor explosion or gas attack, and large-scale attack. For each level, the risk manager listed the risk owners, the risk quadrants impacted, the likelihood of attack, the consequence, the risk level, and the risk control measures that needed to be implemented. This information was summarized in a one-page chart. The chart the risk manager prepared is a

Risk register with scenario model.

Which one of the following statements is true about an organization's balance sheet?

The balance sheet shows the financial position of a business on a specific date.

One form of root cause analysis utilizes a fishbone diagram. Under this technique, a team of investigators brainstorms the causes of a risk event, sorts them into categories, and traces them to their origin. This type of analysis relies heavily on a

"5 Whys" analysis.

Which one of the following types of risk analysis uses historical data to assign specific values to consequences and their probabilities to reach a numeric indication of the level of risk?

. Quantitative analysis

An organization's premises and operations liability losses have a severity distribution with a mean of $10,000 and a standard deviation of $15,000. What is the coefficient of variation for this distribution?

1.5

Granton Manufacturing uses diamond-point cutting tools to manufacture metal plates. The diamond points have an average life of 90 days. Some points last longer and others wear out more quickly; however, overall the average life of the diamond points follows a normal distribution curve with each standard deviation equaling 10 days. Replacing a point requires only 15 minutes. However, if a point fails, Granton often must scrap some of the metal plates, and the process to return to full operations takes over two hours. Based on a normal distribution, what percentage of points will likely fail after 110 days?

2.28%

The chief financial officer of XYZ Insurance Company believes that $50 million is the appropriate capital charge for the company's underwriting division. The division is predicted to generate revenue of $25 million this year and expenses of $22 million. Assuming a risk-free rate of 2% on the capital charge, what is this division's return on capital (ROC)?

8.00%

Which one of the following is an example of a report that would most likely contain both quantitative and qualitative data?

A customer satisfaction survey

In failure mode and effects analysis, a failure mode's effect on a process requires identifying the effect's location in the system being analyzed. A failure mode with an effect on the same level that is being analyzed produces

A local effect.

One of the characteristics of individuals and groups of individuals that affects susceptibility to injury or death caused by a building fire is

Age.

Which one of the following statements is true concerning robotic process automation (RPA)?

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

The board of directors of 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 the internal audit department to administer a risk management questionnaire to employees.

One of the four characteristics that affects an individual's susceptibility to injury or death from a building fire is

Awareness of the fire.

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

Benchmarking.

Parker Panels is a manufacturer of solar energy panels. It relies on a global network of suppliers for the components that go into the panels. In an environment of intensified competition, Parker Panels seeks to eliminate redundant and underused resources. With a large network of suppliers and frequent changes in contract relationships, managing the payment risk is also a challenge. Internal audits revealed more than one occasion when Parker Panels paid for component parts that were never received. Which one of the following technological tools would help Parker Panels manage its payment risk and improve its supply chain risk management?

Blockchain-empowered smart contracts

Three HillsLaw is a legal firm specializing in multiple-plaintiff cases. One current case involves alleged birth defects caused by exposure to polluted groundwater. There are currently 78 plaintiffs represented in the pending legal action. Up-to-date records on the condition of each child is a critical operational concern. Three HillsLaw turned to a secured digital ledger system in which independent third parties (nurses, physicians, and parents) can update the status of individual children, and the record for the entire group is automatically updated. The latest update showed seven children have died, 14 have a terminal diagnosis, 27 have permanent disabilities, and 30 cases are listed as "developing" (awaiting definitive diagnosis). The secured distributed ledger system used by Three HillsLaw is called

Blockchain.

A risk manager for a grocery store wants to see if there is a correlation between the frequency of customer slip and fall accidents, and the time of day. Which one of the following is a relatively simple data analysis technique that the risk manager could use to determine this correlation?

Bubble plot

In the context of a predictive model, a true positive results when the model

Correctly predicts a positive.

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

Credit risk.

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?

Current ratio

Using fault tree analysis, an "and" gate is connecting the events in rectangles C, D, and E to the event in rectangle A. If the probabilities of events in rectangles C, D, and E of the fault tree are .10, .20, and .30, respectively, what is the probability that the event in rectangle A will occur?

Customers.

An individual may make false disparaging statements that harm another's reputation on social media, such as a personal web page. Such comments may lead to a charge of

Defamation.

The general name given to an intentional tort, which covers any false written or oral statement that harms another's reputation is

Defamation.

The important first step in a decision-making model is to

Define the problem

A corporate board of directors owes which one of the following duties regarding material information about a corporation's loss exposures and changes to them?

Duty to disclose

Creative Catering has a 15 year old vehicle that was originally built to prepare and serve sandwiches and drinks at various outdoor functions such as car shows, sporting events, etc. The vehicle is of low value but it generates approximately $100,000 a year in sales. The risk management professional will primarily be concerned about its

Economic value.

The amount that property is worth based on the ability of the property to produce income is known as its

Economic value.

Modifying the contact surface or basic structure that can be affected by installing breakaway highway light poles or requiring front and side airbags in automobiles to cushion occupants' impact is a basic strategy of the

Energy transfer theory

The physical stress on joints, bones, muscles, and nerves and the stress created by such factors as lighting, glare, and noise constitute

Ergonomic stress.

The weighted average of all the possible outcomes of a theoretical probability distribution is the

Expected value.

An organization may use several forms of analysis to prioritize risks and maximize risk control resources. Under one type of analysis, the direction of reasoning in fault tree analysis is reversed by starting with causes and branching out to consequences. This type of analysis is called

Failure mode and effects analysis.

Vicki has been hired to investigate industrial accidents for a biotech company that produces a number of drugs. In most cases, she will be asked to look at a particular system failure and trace the events leading to the failure backwards. Which system safety analysis technique would be most appropriate for this application?

Fault tree analysis

The use of risk quadrants to identify and categorize risk provides a framework for

Holistic risk identification.

Mitch has been an underwriter at Regional Insurance Company for several years. He has always been attracted to one of the file clerks named Debbie. One year on his birthday, Mitch approached Debbie in the file room and asked for a "birthday kiss." Debbie said "no" and laughed it off. Unfortunately, Mitch persisted and became more and more aggressive in his pursuit of the "birthday kiss." Debbie complained to her supervisor, Louise, about the incident with Mitch. Debbie also contended that Mitch has said several things to her over the years and that Louise knew about it but didn't do anything, saying that "Mitch is harmless and wouldn't hurt a fly." Debbie claims sexual harassment and quits her job. She then sues Regional Insurance Company stating that she could no longer work there under the current "working conditions." What is the appropriate term for the "working conditions" to which Debbie was referring?

Hostile work environment

A 5 Whys analysis is used primarily for problems involving

Human factors.

The objective of the Supply Chain Resilience Assessment Model (SCRAM) is to

Identify a zone where specific resilience measures are economically capable of preserving and creating value.

Infection, radiation poisoning, and asbestos exposure can cause

Illness.

The unauthorized intrusion into a company's computer network resulting in damage to intellectual property is best classified as which one of the following types of cyber liability exposures?

Intangible Property

Geneva Auto Repair (GAR) has been operating at the same location for over 20 years. The local newspaper published an article accusing the business of dumping pollutants into a local stream. GAR has denied the activity, and claims to have records of recycling and tank inspections to defend its position. The risk manager performed a text mining of social media websites to see whether any damage has been done to the company's 20 year reputation. The analysis reveals that the negative comments seem to cluster within a particular demographic. This information would help the risk manager in which one of the following ways?

It allows GAR to tailor its response to concentrate on that demographic.

Certain types of property losses such as drought, flood, and earthquake are referred to as natural because

It is beyond human control.

Which one of the following is the initiating event in an event tree analysis?

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

Economic capital attempts to quantify the various risks faced by an organization. One such risk is loss of value because of not properly matching asset and liability cash flows. This risk is called

Liquidity risk.

Regional Airline Company's computer network was hacked. As a result of the cyber attack, the system was down for 20 hours. Passengers and customers were unable to access the company's website. When the website came back on-line, those who visited the site received an e-mail titled, "Sorry for Interruption, Let Us Make it Up to You." The hacker had arranged to send the e-mail apology. Those who opened the e-mail had a virus downloaded to their computer. For those passengers and customers who experience a loss due to the virus, the third-party cyber liability claim would be based on

Network security liability.

Which one of the following is a data analysis technique that operates in a way similar to the human brain?

Neural networks

James is the risk manager for a large manufacturing organization with six locations. Each location has a plant manager who is responsible for the operation of that location. James feels that the plant managers are in the best position to identify and measure risk at their locations. He wants them to own the risk. However, he is looking for a tool that will allow him to prioritize risk according to the potential effect on the organization. James wants an interactive tool that will adequately identify the organization's risks, and allow them to be measured based on likelihood and the level of risk to the organization. Which one of the following is the most appropriate tool for James?

Organizational risk register

Brendan is a new risk manager at a Shelton Manufacturing in North Carolina. Because the company has never experienced any consequences from a hurricane, the previous risk manager never really analyzed the risks associated with such an event. Brendan feels that a hurricane could trigger multiple far-reaching consequences and that the risk requires a thorough analysis. Due to Shelton Manufacturing's lack of historical data Brendan has decided to use a structured process that incorporates expert opinions into the probability estimations. Which one of the following types of risk assessment is Brendan using?

Predictive technique

An organization has implemented a firewall system to prevent its employees from accessing adult and inappropriate websites. The organization believes this will greatly reduce the threat of a viral or denial of service attack from outside sources. Which one of the following best describes the type of risk control measure implemented?

Procedural control

Meat Products Company (MPC) runs packing plants in three Midwest states. The company was in the news recently because of its labor practices. The Department of Labor (DOL) investigated complaints from five female employees that MPC discriminated against them. The DOL found the claim was true. The Immigration and Naturalization Service (INS) found that the company employed illegal immigrants and paid them less than the minimum wage. When this news became public, MPC's reputation was severely harmed. This scenario illustrates which source of reputation risk?

Regulatory and legal compliance

Insurance Company (IC) sells its coverages through independent insurance agents. Independent agents represent several insurance companies. Tom, the president of IC, has learned that the independent agent who is the highest producer for IC is considering selling his agency. IC is considering acquiring the agency since Tom is concerned that if the agency is sold, IC may lose a substantial amount of business. Tom asked IC's risk manager to analyze the prospective purchase. The analysis revealed that the acquisition would likely secure most of IC's book of business with the agency but also revealed local competitors that would try to place the business as well. In addition, the analysis revealed the opportunity for IC to move some accounts currently placed with other insurers over to IC. Also, it was learned that a competitor expressed an interest in the agency acquisition. The analysis performed by the risk manager is a form of

SWOT analysis.

SE Industries has identified windstorm as a risk. The risk manager has assembled a team to project the potential consequences of windstorm. The team includes individuals from various functions within the organization. Which one of the following team approaches to risk identification is SE Industries using?

Scenario Analysis

After one employee was involved in several workplace accidents, the risk manager and the industrial safety engineer concluded that these resulted from ancestry and social environment of the person. Which one of the following accident causation theories or approaches considers this an accident factor?

Sequence of events theory

East Side Fitness has decided to merge with a yoga studio with two locations near-by. The owners believe that with this complimentary business, they will be able to increase the membership fees for current members and also grow the overall membership. Which one of the following quadrants of risk will be most influenced by this decision?

Strategic risk

Blithe Manufacturing suffered an explosion at one of its manufacturing locations. Fortunately, there were no injuries and Blithe has a business continuity plan in place. During this crisis which one of the following stakeholders should be notified of delivery and payment procedures as soon as possible?

Suppliers

The concept of supply chain resilience differs from traditional risk management in which one of the following ways?

Supply chain resilience places a greater emphasis on responding to disruptions than on avoiding them.

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

Systems

One of the ways in which probabilities can be developed is theoretically. Which one of the following is an example of an event for which probability can be determined theoretically?

The number of times heads can be expected to turn up over multiple coin tosses

Which one of the following statements is true with regard to linear regression analysis?

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

Which one of the following statements is most accurate?

The text in organizational files, social media posts, news stories, consumer reviews, and so forth is not automatically meaningful to a machine or an algorithm.

One of the main functions of a risk-based capital allocation model is

To prospectively determine the amount of risk associated with a business activity.

Buildings constructed of reinforced concrete have been successful withstanding this disaster, but building all structures in this manner is neither practical nor economical. This statement pertains to which one of the following disasters?

Tornado

Springer's Garden Centers has five locations in Pennsylvania. Many of its plants are transported from the West coast. A late winter snow storm in Denver and flooding in the mid-western U.S. caused major disruptions to the transportation system. Multiple suppliers are affected. With the Easter holiday and spring planting season approaching, Springer's Garden Center is concerned that it will suffer a significant financial and reputational loss if the plants do not arrive within the next week. Which one of the following would help Springer's Garden Center manage this supply chain risk?

Track and trace technology

An analysis that identifies mathematical patterns in past losses and then projects these patterns into the future is

Trend analysis.

Economic capital is based on a concept that measures the expected loss exceeding a threshold level during a given time period. This concept is called

Value at risk.

The risk management professional for a large multi-location super market chain in the New England area observed that all of the buildings have a flat roof. His concern is primarily due to the possible loss resulting from

Weight of snow, sleet, and ice.

A storm with high winds or violent gusts of wind with little or no rain is which one of the following?

Windstorm

Data analytics is especially useful for

unstructured data