Corporate Risk Management Exam 2
Value Proposition for KRI's
Have ability to improve, performance, improve processes, and improve workplace environment, can provide measurable data to report risks
greater variability
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
Which one of the following statements is true regarding the risk financing goal of maintaining an appropriate level of liquidity?
It is equal to the sum of the present values of each of the separate payments.
Which one of the following analysis methods concentrates on an organization's competitive environment?
Porter's Forces
A predictive approach to data analytics involves
Providing a method to be used repeatedly to provide information
Risk appetite is an important component of strategic risk management (SRM). Which one of the following statements is correct with respect to an organization's risk appetite
Regulatory conditions, political risks, anti trust, and other legal concerns can all lessen a company's risk appetitie
Debt to assets
total liabilities/total assets, if greater than .5, most of the company's assets are financed through debt
The main difference between decision trees and event trees
Event trees analyze consequences of accidental losses rather than decisions
Which one of the following statements is correct with respect to risk tolerance?
can have high end and low end thresholds or both
Which one of the following is an example of exploratory data analysis?
correlation matrix
working capital
current assets - current liabilities
Current Ratio
current assets divided by current liabilities
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?
$10,000, solved by 50,000*$2 = 100,000, then 5,000*$5.5 = 27,500, then 27,5000+62,500= 90,000, then 100,000-90,000 = 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.
$10,020, solve through NPV with including initial payment
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?
$104,513, pmt function in NIPVPMTFV
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?
$12,000 How to Solve: 1.8/1 = 1.8, 1.8 * 15000 = 27000, 27000-15000 = 12000
Assuming an interest rate of 4%, the present value of $30,000 received in three years is
$26,670, 30000/(1.04)^3
Crude Oil Company is considering an investment of $270,000 to replace the outdated clean air system at its refinery. The new equipment will generate a savings of $70,000 per year for each year of its six-year life. Crude's cost of capital is 12%. What is the present value of the cash inflows from the proposed investment, ignoring income taxes?
$287,798, THIS SAYS PV OF CASH INFLOWS, npv with NOOOOOOOO initial payment
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
The sum of all probabilities is equal to
1
5 steps of strategic management
1. Develop goals - mission and vision 2. Analyze internal and external environment - SWOT, Pestle, Porter's 5 Forces 3. Formulating strategies- is it suitable, feasible, applicable, possible 4. Implementing strategies - whole organization plays a roll 5. Evaluation - monitor progress towards goals, use balance scorecard
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?
1.5, solve by 2.4/1.6 = 1.5
while implementing strategies, there are 5 steps for department managers
1.Identify and document processes, tasks and responsibilities 2.Frequently communicate information about the plan 3.Assign specific responsibilities, tasks, authority and accountability 4.Allocate resources (money, time, training, equipment, people) 5.Make necessary adjustments to stay on track
Assuming a normal distribution, 34.13% of all outcomes are within one standard deviation above the mean. If the portion of the distribution between one and two standard deviations above the mean contains 13.59% of all outcomes, what percentage is contained in the area between the mean and two standard deviations below the mean?
47.72% (34.13+13.59)
A special purpose vehicle
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.
Probability analysis is best suited for organizations that have
A substantial volume of data on past losses
Trend factor
An adjustment to loss data for a change in general economic conditions, such as inflation.
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?
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
In capital budgeting decisions, the main noncash item affecting income taxes is
Depreciation of long term assets
How to calculate period-to-period loss development factor
Divide greater month from loss triangle from previous month
Strategic Risk
Can affect positive or negative long term performance, include any factors that could impact busienss, external factors and internal, prevent problems and exploit opportunities, goal is to determine which business decisions are worth the risk
Nancy, the general liability claims manager, is concerned about a significant rise in claim frequency in the state of NJ during the past 18 months. she cannot identify the cause of the increase and has asked James, a data analyst, to help. James decides to develop a model to analyze the dataset of NJ claims, and see if any previously unknown grouping can be identified for further analysis. Which one of the following data analysis techniques is James using?
Cluster analysis
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 200000 10% of the time
Empirical Probabilities
Estimates whose accuracy depends on the size and representative nature of the samples being studied
KRI V. KPI
KRI is data about write-offs of accounts in most recent month, quarter, year, it revolves around historical performance KPI is an analysis of reported financial results for the comapny's 35 largest customers or general challenges throughout the industry that highlight trends signlaling future collection concerns
Debt to equity
Long Term Debt / Shareholders Equity
Liquidity ratios
Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.
Loss triangle approach
One loss development method involves projecting prior year's loss data into the future using a chain-ladder approach. Under this method, age-to-age development factors are calculated and averaged, and losses from a previous year are multiplied by the appropriate average age-to-age factors to estimate ultimate losses for that year. This loss development method is called the
Difference between operational and strategic
Operational: making sure things are done right, strategic: doing the right things and making right decisions to ensure that the organization achieves its goals
Sources for developing KRI's
Past risks, employee accounts, trade publications & loss registries compiled by independent information
Which one of the following is the most intangible and abstract of the four risk quadrants?
Strategic risk
Risk appetite
The amount of risk a company is willing to accept to achieve its goals and objectives. To avoid undue risk, risk appetite must be in alignment with company strategy.
Risk Tolerance
The degree, amount, or volume of risk that an organization or individual will withstand.
Which one of the following is the goal with strategic risk?
The goal is to use information about strategic risks to make informed decisions that optimize the risk-reward ratio.
A source of a rapidly growing quantity of external data is
The internet of things
For those organizations that use the internal records of their own past losses to estimate future losses,
The law of large numbers makes such estimates more accurate the larger the organization is.
3 types of major financial risk
credit risk, market risk, price risk
Regression analysis assumes that
The variable being forecast varies predictably with another variable.
expected value
The weighted average of all of the possible outcomes of a probability distribution.
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
How KRI's provide opportunities for proactive strategic management
Tracking risks in advance of them occurring, management sets up desired risk threshold prior to the events
Tania works in the fraud unit for Greatview Insurance. There is a claimant who appears to be involved in multiple cases of insurance fraud. Tania decides to use social media to obtain information that may be used to develop a profile of the claimant. Tania's use of social media is an example of which one of the following types of data?
Unstructured external
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?
Using call options may actually reduce the profitability of a transaction.
Balance sheet
a "snapshot" of an organization's financial position at a given moment
Text mining
a data analysis technique that an insurer would likely use to analyze claims adjuster's notes
Which of the following statements is true regarding a generic model of securitization
The organization sells income-producing assets to an SPV in exchange for cash
Price risk
The potential for a change in revenue or cost because of an increase or a decrease in the price of a product or an input
Strategic management
The process of identifying, describing, and continually evaluating the business decisions •and strategies of an organization to facilitate better performance and/or create a competitive advantage •It's the responsibility of senior executives and the BOD
Big data includes
both structured and unstructured data
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 insufficient loss experience to meaningfully estimate loss probability
Which one of the following statements is true regarding the strategic management process?
The strategic management process can be applied to any type of organization, including business, not-for-profit organizations, and government entities.
Like most insurance companies, the majority of insurance company's portfolio is invested in bonds. If interest rates increase, the value of the bonds will decrease. This risk is...
interest rate risk
Market risk major categories
interest rate risk (risk that a secruity's future value will decline because of changes in interest rates), exchange rate risk (uncertainty about an investments value because of potential changes in the exchange rate between securities), and liquidity risk (uncertainty that an organization will have enough cash or liquid assets
market risk
interest rate risk, exchange rate risk, liquidity risk
Which one of the following indicates the values of the target variable on a classification tree?
leaf nodes
How to develop effective risk indicators
must be relevant, design linkages between objects & potential risks, analyze risks that the company has taken on in the past
Which one of the following is a data analysis technique that operates in a way similar to the human brain?
neural networks
Loss development factor
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
Which one of the following is a legal and regulatory concern in obtaining mass information from social media?
privacy
Leverage ratios
ratios that measure the extent to which a firm relies on debt financing in its capital structure
Strategic risk can be created and affected by external factors or internal factors. Which one of the following is considered an internal factor?
resource allocation
credit risk
risk that the other party to an agreement will default. Uncertainty that a party obligated to pay will fulfill their obligation, only negative potential
SWOT
strengths, weaknesses, opportunities, threats
