(Test Bank) Principles Of Risk Management And Insurance

Rejda,Mcnamara, 14

Business

Test Bank

14th Edition

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Test Bank for Principles Of Risk Management And Insurance, The downloadable file consists of 433 pages, and the total size of the file is 3.68 MB. Purchase now only for highly discounted price.

Author(s): Rejda, Mcnamara

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1 Copyright © 2020 Pearson Education, Inc. Principles of Risk Management and Insurance, 14e (Rejda) Chapter 1 Risk and Its Treatment 1) Traditionally, ris k has been defined as A) any situation in which the probability of loss is one. B) any situation in which the pr obability of loss is zero. C) uncertainty concerning t he occurrence of loss. D) the probability of a loss occurring. Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 2) Objective risk is defined as A) the probability of loss. B) the relative variation of act ual loss from expected loss. C) uncertainty based on a person' s mental condition or state of mind. D) the cause of loss. Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 3) An insurance company estimat es its objective risk for 10,000 exposures to be 10 percent. Assuming the probability of loss remains the same, what would h appen to the objective risk if the number of exposures were to increase to 1 million? A) It would decrea se to 1 percent. B) It would decrea se to 5 percent. C) It would remain the same. D) It would increa se to 20 percent. Answer: A Diff: 3 Question Status: Previous Edition AACSB: Analytical Thinking 4) Uncertainty based on a person' s mental condition or state of mind is known as A) objective risk. B) subjective risk. C) objective probability. D) subjective probability. Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 2 Copyright © 2020 Pearson Education, Inc. 5) The long-run relative fre quency of an event based on the ass umption of an infinite number of observations with no change in the underlying conditions is cal led A) objective probability. B) objective risk. C) subjective probability. D) subjective risk. Answer: A Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 6) Which of the following statements about a priori probabilities is correct? A) They are subjective probabilit ies based on ambiguity in the way probability is perceived. B) They are subjective probabilit ies that may vary among indivi duals because of factors such as age, gender, education, and the use of alcohol. C) They are objective probabil ities that can be determined by d eductive reasoning. D) They are objective probabil ities that can be determined by s ubjective reasoning. Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 7) An individual's personal estim ate of the chance of loss is a (n) A) objective probability. B) objective risk. C) subjective probability. D) a priori probability. Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 8) A peril is A) a moral hazard. B) the cause of a loss. C) a condition that increases the chance of a loss. D) the probability that a loss will occur. Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 3 Copyright © 2020 Pearson Education, Inc. 9) An earthquake is an example of a(n) A) moral hazard. B) peril. C) physical hazard. D) objective risk. Answer: B Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 10) Dense fog that increases the chance of an automobile accide nt is an example of a A) speculative risk. B) peril. C) physical hazard. D) moral hazard. Answer: C Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 11) Faking an accident to collect i nsurance proceeds is an exam ple of A) physical hazard. B) objective risk. C) moral hazard. D) attitudinal hazard. Answer: C Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 12) Carelessness or indifferen ce to a loss is an example of A) physical hazard. B) objective probability. C) moral hazard. D) attitudinal hazard. Answer: D Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 4 Copyright © 2020 Pearson Education, Inc. 13) Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. This hazard is called A) moral hazard. B) physical hazard. C) attitudinal hazard. D) legal hazard. Answer: D Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 14) Taylor Tobacco Company is concerned that the company may be held liable in a court of law and ordered to pay a large damage award to a smoker harmed by t he company's cigarettes. The characteristics of the judicial system that increase the freque ncy and severity of loss are known as A) moral hazard. B) particular risk. C) speculative risk. D) legal hazard. Answer: D Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 15) A name that encompasses a ll of the major risks faced by a b usiness firm is A) financial risk. B) speculative risk. C) enterprise risk. D) pure risk. Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 16) Which of the following stateme nts about financial risk is ( are) true? I. Enterprise risk does not i nclude financial risk. II. Financial risk i s easily addressed th rough the purchase of insurance. A) I only B) II only C) both I and II D) neither I nor II Answer: D Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 5 Copyright © 2020 Pearson Education, Inc. 17) One of the speculative finan cial risks considered in an ent erprise risk management program is the risk of loss because of adverse changes in commodity pri ces, interest rates, foreign exchange rates, and the value of money. This risk is called A) property risk. B) financial risk. C) strategic risk. D) operational risk. Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 18) Katelyn was just named Ris k Manager of ABC Company. She has decided to create a risk management program which considers all of the risks faced by AB C–pure, speculative, operational, and strategic–in a sin gle risk management program. Such a program is called a(n) A) financial risk management program. B) enterprise risk management program. C) fundamental risk management program. D) consequential risk management program. Answer: B Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 19) A pure risk is defined as a situation in which there is A) only the possibility of loss or no loss. B) only the possibi lity of profit. C) a possibility of neither profit nor loss. D) a possibility of either profit or loss. Answer: A Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 20) The premature death of an i ndividual is an example of a A) pure risk. B) speculative risk. C) nondiversifiable risk. D) physical hazard. Answer: A Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 6 Copyright © 2020 Pearson Education, Inc. 21) Which of the following stateme nts about speculative risks i s true? A) They are almost always ins urable by private insurers. B) They are more easily predictable than pure risks. C) They may benefit societ y even though a loss occurs. D) They involve only a chance of loss. Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 22) A family's automobile that is a total loss as a result of a collision is an example of which of the following types of risk? I. Speculative risk II. Diversifiable risk A) I only B) II only C) both I and II D) neither I nor II Answer: B Diff: 1 Question Status: Revised AACSB: Reflective Thinking 23) All of the following are prog rams to insure nondiversifiabl e risks EXCEPT A) federal flood insurance. B) auto physical dam age insurance. C) Social Security. D) unemployment insurance. Answer: B Diff: 1 Question Status: Revised AACSB: Application of Knowledge 24) All of the following are exam ples of personal risks EXCEPT A) poor health. B) unemployment. C) premature death. D) loss of business income. Answer: D Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 7 Copyright © 2020 Pearson Education, Inc. 25) Which of the following is a reason why premat ure death may result in economic insecurity? I. Additional expenses associa ted with death may be incurred. II. The income of the deceased person's family may be inadequat e to meet its basic needs. A) I only B) II only C) both I and II D) neither I nor II Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 26) Which of the following is (a re) often consequences of long- term disability? I. Continuing medical expenses II. Loss or reduction of employee benefits A) I only B) II only C) both I and II D) neither I nor II Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 27) Which of the following is a n example of consequential (indi rect) loss? A) the theft of a person's jewelry B) the destruction of a firm's manufacturing plant by an earthq uake C) the cost of renting a substitute vehicle while a collision-d amaged car is being repaired D) the vandalism of a p erson's automobile Answer: C Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 28) The extra expense incurre d by a business t o stay in operati on following a fire is an example of a(n) A) fundamental risk. B) speculative risk. C) direct loss. D) indirect loss. Answer: D Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 8 Copyright © 2020 Pearson Education, Inc. 29) Which of the following statements about liability risks is (are) true? I. Future income and assets ca n be attached to pay judgments if inadequate insurance is carried. II. There is an upper lim it on the amount of loss. A) I only B) II only C) both I and II D) neither I nor II Answer: A Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 30) All of the following are bur dens to society because of the presence of risk EXCEPT A) The size of an emergen cy fund must be increased. B) Risk provides an incentive fo r people to engage in risk cont rol. C) Society is deprived o f certain goods and services. D) Mental fear and worry are present. Answer: B Diff: 1 Question Status: Revised AACSB: Application of Knowledge 31) Loss control includes which of the following? I. Loss reduction II. Loss prevention A) I only B) II only C) both I and II D) neither I nor II Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 32) Following good health habits can be categorized as A) loss prevention. B) risk retention. C) noninsurance transfer. D) personal insurance. Answer: A Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 9 Copyright © 2020 Pearson Education, Inc. 33) From the insured's perspective, the use of deductibles in i nsurance contracts is an example of A) risk transfer. B) risk control. C) risk avoidance. D) risk retention. Answer: D Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 34) The use of fire-resistive ma terials when constructing a bui lding is an example of A) risk transfer. B) risk control. C) risk avoidance. D) risk retention. Answer: B Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 35) All of the following statemen ts about risk retention are tr ue EXCEPT A) It may be used intentionally if commercial insurance is unav ailable. B) It may be used passively because of ignorance. C) Its use is most appropriate for low-frequency, high-severity types of risks. D) Its use results in cost savings if losses are less than the cost of insurance. Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 36) Which of the following is a n example of a noninsurance risk transfer? A) not engaging in dangerous activities B) entering into a hold-harmless agreement C) installing smoke detectors in your home D) using nonflammable building mat erial when constructing a hou se Answer: B Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 10 Copyright © 2020 Pearson Education, Inc. 37) Curt borrowed money from a bank to purchase a fishing boat. He purchased property insurance on the boat. Curt ha d difficulty making loan payments because he did not catch many fish, and fish prices were low. C urt intentionally sunk the boa t, collected from his insurer, and paid off the loan balance. This scenario illustrates the proble m of A) adverse selection. B) moral hazard. C) nondiversifiable risk. D) attitudinal hazard. Answer: B Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 38) Jenna opened a successful res taurant. One night, after the restaurant had close d, a fire started when the electrical system ma lfunctioned. In addition to the ph ysical damage to the restaurant, Jenna lost profits that could have been earned while the restau rant was closed for repairs. The lost profits are an example of A) direct loss. B) nondiversifiable risk. C) speculative risk. D) indirect loss. Answer: D Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 39) Brad started a pest contro l business. To protect his person al assets against liability arising out of the business, Brad incorporate d the business. Brad's use of the corporate form of organization to shield against personal liability claims illustrates A) fundamental risk. B) noninsurance transfer. C) risk retention. D) objective risk. Answer: B Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 11 Copyright © 2020 Pearson Education, Inc. 40) ABC Insurance Company plans to sell homeowners insurance in five Western states. ABC expects that 8 homeowners out of every 100, on average, will re port claims each year. The variation between the rate of lo ss that ABC expects to occur an d the rate of loss that actually occurs is called A) objective probability. B) subjective probability. C) objective risk. D) subjective risk. Answer: C Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 41) Williams Company installed smoke detectors, a sprinkler sys tem, and fire extinguishers in its new manufacturing facility. These d evices are all examples of A) risk control. B) noninsurance transfer. C) risk avoidance. D) risk retention. Answer: A Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 42) Which of the following state ments about hedging is (are) tr ue? I. Hedging is a form of risk transfer. II. Hedging is used to address th e risk of unfavorable price fl uctuations. A) I only B) II only C) both I and II D) neither I nor II Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 43) Cathy's car hit a patch of ice on the road. The car skidded off the road and hit a tree. The presence of ice on the road i s best described as a(n) A) peril. B) subjective risk. C) physical hazard. D) indirect loss. Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 12 Copyright © 2020 Pearson Education, Inc. 44) Jim and Paula Franklin started a dry cleaning business. The business may be successful or it may fail. The type of risk that is present when either a profit or loss could occur is called A) pure risk. B) subjective risk. C) nondiversifiable risk. D) speculative risk. Answer: D Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 45) Ben is concerned that if he i njures someone or damages some one's property he could be held legally responsible and require d to pay damages. This type of r isk is called a A) speculative risk. B) liability risk. C) nondiversifiable risk. D) property risk. Answer: B Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 46) MLX Drug Company would like to market a new hypertension dr ug. While the Food and Drug Administration (FDA) was t esting the drug, it discovered t hat the drug produced a harmful side effect. When MLX learned of t he FDA's test result, MLX aba ndoned its plan to produce and distribute the drug. MLX's reaction illustrates A) risk avoidance. B) hedging. C) risk transfer. D) risk retention. Answer: A Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 47) ABC Insurance Company sells auto insurance in one state. Re cently, the state legislature passed a law that limits the use of an individual's credit hist ory by insurers when selecting applicants to insure. This change in law will increase the poss ibility of unprofitable results for ABC. This type of hazard is an example of A) physical hazard. B) legal hazard. C) moral hazard. D) attitudinal hazard. Answer: B Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 13 Copyright © 2020 Pearson Education, Inc. 48) All of the following are char acteristics of the liability r isk that most people face EXCEPT A) a lien may be placed on your income and assets to satisfy a legal judgment. B) substantial legal expenses may be incurred defending the cla im. C) there is no upper limit on the amount of the loss. D) owning liability insurance el iminates the possibility of bei ng held legally liable. Answer: D Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 49) Which of the following stateme nts about chance of loss and risk is (are) true? I. If the chance of loss is i dentical for two groups, the objec tive risk must be the same. II. Two individuals may perceive d ifferently the risk inherent in a given activity. A) I only B) II only C) both I and II D) neither I nor II Answer: B Diff: 2 Question Status: Previous Edition AACSB: Application of Knowledge 50) A risk that affects onl y individuals or small groups and no t the entire economy is called a A) diversifiable risk. B) pure risk. C) speculative risk. D) nondiversifiable risk. Answer: A Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 51) Which of the following is an e xample of a commercial risk? A) the risk of insufficient retirement income B) the loss of business income C) the risk of premature death D) the risk of being unemployed Answer: B Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 14 Copyright © 2020 Pearson Education, Inc. 52) A special form of planned r etention by which part or all of a give loss exposure is retained by the firm is called A) hedging. B) self-insurance. C) passive retention. D) noninsurance transfer. Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 53) The production facility for A BC Manufacturing is located in a flood plain. Although the risk of flood is low, ABC's risk manag er is concerned that a flood c ould damage the plant and equipment. He received bids on f lood insurance from two insuran ce agents, but decided the cost of coverage was too high rela tive to the risk. So he did not pu rchase flood insurance. Which risk management technique is ABC usi ng with respect to the risk of f lood? A) active retention B) noninsurance transfer C) passive retention D) avoidance Answer: A Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 54) A student who has skipped man y classes and not studied the course material was surprised to learn there was a test when he s howed-up for class. The student 's mental uncertainty about whether or not he will pass the test is called A) objective risk. B) objective probability. C) subjective probability. D) subjective risk. Answer: D Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 55) Rapid inflation, cyclical unemp loyment, war, hurricanes, an d floods are all examples of A) diversifiable risks. B) physical hazards. C) nondiversifiable risks. D) speculative risks. Answer: C Diff: 1 Question Status: Previous Edition AACSB: Reflective Thinking 15 Copyright © 2020 Pearson Education, Inc. 56) Five years ago, Shannon decide d to start investing monthly in the common stock of ABC Telecom Company. Her financial w ell-being will be harmed if the price of ABC Telecom stock drops significantly. The risk of i nvestment loss can be reduced if she invests in other companies and other types of financial a ssets. The risk Shannon faces wit h regard to her investments is a(n) A) enterprise risk. B) diversifiable risk. C) pure risk. D) nondiversifiable risk. Answer: B Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 57) Frazier Electric keeps a pa per copy of business records at the company's headquarters. The company also has two back-up copies of business records stored in electronic files. The electronic files are kept in the event the paper records are da maged or destroyed. The back-up files illustrate which of the f ollowing risk control techniques ? A) loss prevention B) loss reduction C) diversification D) duplication Answer: D Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 58) Rather than storing all of its finished goods in a single l ocation, Davis Com pany divides the finished goods between two ware houses. This simple risk control technique which is designed to limit losses should a warehouse fire occur is called A) duplication. B) risk transfer. C) separation. D) loss prevention. Answer: C Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking