Question 1

The long-run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called

Accepted Answer

A)  objective probability. 
B)  objective risk. 
C)  subjective probability. 
D)  subjective risk. 
A)  objective probability. 
B)  objective risk. 
C)  subjective probability. 
D)  subjective risk. A

Question 2

Which of the following is a reason why premature death may result in economic insecurity?
I.Additional expenses associated with death may be incurred.
II.The income of the deceased person's family may be inadequate to meet its basic needs.

Accepted Answer

A)  I only 
B)  II only 
C)  both I and II 
D)  neither I nor II 
A)  I only 
B)  II only 
C)  both I and II 
D)  neither I nor II C

Question 3

A student who has skipped many classes and not studied the course material was surprised to learn there was a test when he showed-up for class. The student's mental uncertainty about whether or not he will pass the test is called

Accepted Answer

A)  objective risk. 
B)  objective probability. 
C)  subjective probability. 
D)  subjective risk. 
A)  objective risk. 
B)  objective probability. 
C)  subjective probability. 
D)  subjective risk. D

Question 4

All of the following are characteristics of the liability risk that most people face EXCEPT

Accepted Answer

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 claim. 
C)  there is no upper limit on the amount of the loss. 
D)  owning liability insurance eliminates the possibility of being held legally liable. 
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 claim. 
C)  there is no upper limit on the amount of the loss. 
D)  owning liability insurance eliminates the possibility of being held legally liable.

Question 5

Which of the following statements about chance of loss and risk is (are) true?
I.If the chance of loss is identical for two groups, the objective risk must be the same.
II.Two individuals may perceive differently the risk inherent in a given activity.

Accepted Answer

A)  I only 
B)  II only 
C)  both I and II 
D)  neither I nor II 
A)  I only 
B)  II only 
C)  both I and II 
D)  neither I nor II

Question 6

Curt borrowed money from a bank to purchase a fishing boat. He purchased property insurance on the boat. Curt had difficulty making loan payments because he did not catch many fish, and fish prices were low. Curt intentionally sunk the boat, collected from his insurer, and paid off the loan balance. This scenario illustrates the problem of

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  nondiversifiable risk. 
D)  attitudinal hazard. 
A)  adverse selection. 
B)  moral hazard. 
C)  nondiversifiable risk. 
D)  attitudinal hazard.

Question 7

A name that encompasses all of the major risks faced by a business firm is

Accepted Answer

A)  financial risk. 
B)  speculative risk. 
C)  enterprise risk. 
D)  pure risk. 
A)  financial risk. 
B)  speculative risk. 
C)  enterprise risk. 
D)  pure risk.

Question 8

Rapid inflation, cyclical unemployment, war, hurricanes, and floods are all examples of

Accepted Answer

A)  diversifiable risks. 
B)  physical hazards. 
C)  nondiversifiable risks. 
D)  speculative risks. 
A)  diversifiable risks. 
B)  physical hazards. 
C)  nondiversifiable risks. 
D)  speculative risks.

Question 9

Jenna opened a successful restaurant. One night, after the restaurant had closed, a fire started when the electrical system malfunctioned. In addition to the physical damage to the restaurant, Jenna lost profits that could have been earned while the restaurant was closed for repairs. The lost profits are an example of

Accepted Answer

A)  direct loss. 
B)  nondiversifiable risk. 
C)  speculative risk. 
D)  indirect loss. 
A)  direct loss. 
B)  nondiversifiable risk. 
C)  speculative risk. 
D)  indirect loss.

Question 10

Loss control includes which of the following?
I.Loss reduction
II.Loss prevention

Accepted Answer

A)  I only 
B)  II only 
C)  both I and II 
D)  neither I nor II 
A)  I only 
B)  II only 
C)  both I and II 
D)  neither I nor II

Question 11

Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. This hazard is called

Accepted Answer

A)  moral hazard. 
B)  physical hazard. 
C)  attitudinal hazard. 
D)  legal hazard. 
A)  moral hazard. 
B)  physical hazard. 
C)  attitudinal hazard. 
D)  legal hazard.

Question 12

Which of the following statements about speculative risks is true?

Accepted Answer

A)  They are almost always insurable by private insurers. 
B)  They are more easily predictable than pure risks. 
C)  They may benefit society even though a loss occurs. 
D)  They involve only a chance of loss. 
A)  They are almost always insurable by private insurers. 
B)  They are more easily predictable than pure risks. 
C)  They may benefit society even though a loss occurs. 
D)  They involve only a chance of loss.

Question 13

Which of the following statements about a priori probabilities is correct?

Accepted Answer

A)  They are subjective probabilities based on ambiguity in the way probability is perceived. 
B)  They are subjective probabilities that may vary among individuals because of factors such as age, gender, education, and the use of alcohol. 
C)  They are objective probabilities that can be determined by deductive reasoning. 
D)  They are objective probabilities that can be determined by subjective reasoning. 
A)  They are subjective probabilities based on ambiguity in the way probability is perceived. 
B)  They are subjective probabilities that may vary among individuals because of factors such as age, gender, education, and the use of alcohol. 
C)  They are objective probabilities that can be determined by deductive reasoning. 
D)  They are objective probabilities that can be determined by subjective reasoning.

Question 14

A risk that affects only individuals or small groups and not the entire economy is called a

Accepted Answer

A)  diversifiable risk. 
B)  pure risk. 
C)  speculative risk. 
D)  nondiversifiable risk. 
A)  diversifiable risk. 
B)  pure risk. 
C)  speculative risk. 
D)  nondiversifiable risk.

Question 15

An 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

Accepted Answer

A)  I only 
B)  II only 
C)  both I and II 
D)  neither I nor II 
A)  I only 
B)  II only 
C)  both I and II 
D)  neither I nor II

Question 16

Brad started a pest control business. To protect his personal assets against liability arising out of the business, Brad incorporated the business. Brad's use of the corporate form of organization to shield against personal liability claims illustrates

Accepted Answer

A)  fundamental risk. 
B)  noninsurance transfer. 
C)  risk retention. 
D)  objective risk. 
A)  fundamental risk. 
B)  noninsurance transfer. 
C)  risk retention. 
D)  objective risk.

Question 17

Which of the following statements about hedging is (are) true?
I.Hedging is a form of risk transfer.
II.Hedging is used to address the risk of unfavorable price fluctuations.

Accepted Answer

A)  I only 
B)  II only 
C)  both I and II 
D)  neither I nor II 
A)  I only 
B)  II only 
C)  both I and II 
D)  neither I nor II

Question 18

Carelessness or indifference to a loss is an example of

Accepted Answer

A)  physical hazard. 
B)  objective probability. 
C)  moral hazard. 
D)  attitudinal hazard. 
A)  physical hazard. 
B)  objective probability. 
C)  moral hazard. 
D)  attitudinal hazard.

Question 19

Objective risk is defined as

Accepted Answer

A)  the probability of loss. 
B)  the relative variation of actual loss from expected loss. 
C)  uncertainty based on a person's mental condition or state of mind. 
D)  the cause of loss. 
A)  the probability of loss. 
B)  the relative variation of actual loss from expected loss. 
C)  uncertainty based on a person's mental condition or state of mind. 
D)  the cause of loss.

Question 20

Which of the following is an example of consequential (indirect) loss?

Accepted Answer

A)  the theft of a person's jewelry 
B)  the destruction of a firm's manufacturing plant by an earthquake 
C)  the cost of renting a substitute vehicle while a collision-damaged car is being repaired 
D)  the vandalism of a person's automobile 
A)  the theft of a person's jewelry 
B)  the destruction of a firm's manufacturing plant by an earthquake 
C)  the cost of renting a substitute vehicle while a collision-damaged car is being repaired 
D)  the vandalism of a person's automobile

Exam 1: Risk and Its Treatment

The long-run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called

Which of the following is a reason why premature death may result in economic insecurity? I.Additional expenses associated with death may be incurred. II.The income of the deceased person's family may be inadequate to meet its basic needs.

A student who has skipped many classes and not studied the course material was surprised to learn there was a test when he showed-up for class. The student's mental uncertainty about whether or not he will pass the test is called

All of the following are characteristics of the liability risk that most people face EXCEPT

Which of the following statements about chance of loss and risk is (are) true? I.If the chance of loss is identical for two groups, the objective risk must be the same. II.Two individuals may perceive differently the risk inherent in a given activity.

A name that encompasses all of the major risks faced by a business firm is

Rapid inflation, cyclical unemployment, war, hurricanes, and floods are all examples of

Loss control includes which of the following? I.Loss reduction II.Loss prevention

Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. This hazard is called

Which of the following statements about speculative risks is true?

Which of the following statements about a priori probabilities is correct?

A risk that affects only individuals or small groups and not the entire economy is called a

An 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

Brad started a pest control business. To protect his personal assets against liability arising out of the business, Brad incorporated the business. Brad's use of the corporate form of organization to shield against personal liability claims illustrates

Which of the following statements about hedging is (are) true? I.Hedging is a form of risk transfer. II.Hedging is used to address the risk of unfavorable price fluctuations.

Carelessness or indifference to a loss is an example of

Objective risk is defined as

Which of the following is an example of consequential (indirect) loss?

Insurance and Risk

Introduction to Risk Management

Enterprise Risk Management and Related Topics

Types of Insurers and Marketing Systems

Insurance Company Operations

Financial Operations of Insurers

Government Regulation of Insurance

Fundamental Legal Principles

Analysis of Insurance Contracts

Life Insurance

Life Insurance Contractual Provisions

Buying Life Insurance

Annuities and Individual Retirement Accounts

Health-Care Reform; Individual Health Insurance Coverages

Employee Benefits: Group Life and Health Insurance

Employee Benefits: Retirement Plans

Social Insurance

The Liability Risk

Auto Insurance

Auto Insurance (continued)

Homeowners Insurance, Section I

Homeowners Insurance, Section II

Other Property and Liability Insurance Coverages

Commercial Property Insurance

Commercial Liability Insurance

Crime Insurance and Surety Bonds

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