ARM 400 Chapter 1

Question 1

What is big data?

Answer 1

Large sets of data that are too large to be gathered and analyzed by traditional methods.

Question 2

What is a smart product?

Answer 2

An item that uses sensors, wireless sensor networks for data collection , transmission and analysis to further enable the item to be faster, more useful or otherwise improved.

Question 3

What is the Internet of Things (IoT)?

Answer 3

A network of objects that transmit data to and from each other without human interaction.

Question 4

What is cloud computing?

Answer 4

Information, technology and storage services contractually provided from remote locations through the internet or another network without a direct server connection.

Question 5

Define the sharing medium called blockchain?

Answer 5

It is a distributed digital ledger that facilitates secure transactions without the need for a third party. It is typically independently verified and is therefore a trusted source.
It is a collectively shared ledger that is continuously growing list of records called blocks, in chronological order

Question 6

What is the process called that confirms new blocks and the data within called?

Answer 6

Mining, which allows verification without an intermediary and establishes trust without a centralized authority.

Question 7

How is text mining used?

Answer 7

To compare documents and analyze notes for various purposes.

Question 8

How is risk appetite defined?

Answer 8

It is the amount of risk an organization is willing to take on in order to achieve an anticipated result.

Question 9

What is value at risk (VaR)?

Answer 9

A technique to quantify financial risk by measuring the likelihood losing more than a specific dollar amount.

Question 10

How is a hazard risk defined and how is it managed?

Answer 10

A risk that could destroy an organization’s facilities, injure employees or customers. Risk managers use loss control and risk transfer to manage these risks.

Question 11

What are two ways a holistic risk management strategy empowers organizations to improve their capital allocation?

Answer 11

1. Reducing the cost of risk, freeing up capital for other purposes.
2. By improving risk analysis for various strategic options so that capital is allocated where it is most likely to produce the best reward for the risk.

Question 12

How is cost of risk defined?

Answer 12

The total cost incurred by an organization because of the possibility of accidental loss.

Question 13

The cost of risk that is associated with a particular asset or activity is the total of what costs?

Answer 13

1. Cost of accidental losses that are not reimbursed.
2. Insurance premiums and expenses.
3. Cost of risk control techniques to prevent or mitigate losses.
4. Costs of administering risk management activities.

Question 14

Risk management supports _______ while ______ its cost.

Answer 14

safety, minimizing

Question 15

What are the basic risk measures? Hint - EVLCTC

Answer 15

Exposure
Volatility
Likelihood
Consequences
Time horizon
Correlation

Question 16

Define exposure as it relates to basic risk measures.

Answer 16

Any condition that presents a possibility of a gain or a loss, whether or not it occurs.

Question 17

Define volatility as it relates to basic risk measures.

Answer 17

Frequent fluctuations, such as in the price of an asset.

Question 18

Define consequences as it relates to basic risk measures.

Answer 18

The effects, positive or negative, of an occurrence.

Question 19

Define likelihood as it relates to basic risk measures.

Answer 19

A qualitative estimate of the certainty with which the outcome of a certain event can be predicted.

Question 20

Define time horizon as it relates to basic risk measures.

Answer 20

Estimated duration

Question 21

Define correlation as it relates to basic risk measures.

Answer 21

A relationship between variables

Question 22

In regards to the term likelihood used in relation to basic risk measures, why is that term used instead of probability?

Answer 22

Because probability analysis relies on the law of large numbers, which basically means that the larger the sample size, the more representative the probability of occurrence is of the whole. Most organizations need to determine these things without the benefit of large numbers.

Question 23

___________ time horizons are generally _______ than ______ ones.

Answer 23

longer, riskier, shorter

Question 24

What are the 4 classifications of risk that are most commonly used? ( Hint - P/S, S/O, D/UD, QoR)

Answer 24

1. Pure and speculative risk
2. Subjective and objective risk
3. Diversifiable and nondiversifiable risk
4. Quadrants of risk. (Hazard, operational, Financial, strategic)

Question 25

How is pure risk defined?

Answer 25

It is a chance of loss or no loss.

Question 26

Why are pure risks always considered undesirable?

Answer 26

Because there is no opportunity for financial gain.

Question 27

How is speculative risk defined?

Answer 27

A risk that involves a chance of gain.

Question 28

Speculative risk is highly affected by what factors?

Answer 28

1. Price risk - uncertainty about cash flows resulting from possible changes in the cost of raw materials and other inputs as well as cost-related changes in the market for completed products and other outputs.
2. Credit risk - is particularly significant for banks and financial institutions but can be significant for any business that has accounts receivable.

Question 29

Insurance risks are generally classified as ____, ______. and ___________.

Answer 29

pure, objective and diversifiable.

Question 30

Insurance deals primarily with risks of _____, not risks of_____.

Answer 30

loss, gain

Question 31

What is subjective risk?

Answer 31

The PERCEIVED amount of risk based on an individual’s or organizations OPINION.

Question 32

What is objective risk?

Answer 32

The MEASURABLE variation in uncertain outcomes based on facts and data.

Question 33

How do subjective and objective risk tend to differ?

Answer 33

1. Familiarity and control - the opinion and feelings about a particular risk may not be supported by facts about the risk.
2. Consequences over likelihood - Higher risk events are perceived by people to be less likely to occur and the low risk events are seen as being less likely to occur.
3. Risk awareness - How aware an organization is about the likelihood of a risk to occur affects it’s awareness of it happening

Question 34

Diversiviable risk is defined as?

Answer 34

A risk that affects only some individuals, businesses and or small groups. It is not highly correlated, and gains or losses tend to occur randomly.

Question 35

What is the best way to manage diversifiable risk?

Answer 35

Through diversification - the spreading out of risk.

Question 36

What are some examples of diversifiable risks?

Answer 36

Fire which is likely to only affect one or a small number of businesses. Investments.

Question 37

What are some examples of nondiversifiable risks?

Answer 37

Inflation, unemployment, natural disasters. Nondiversifiable risks are correlated, meaning that they can affect multiple businesses at the same time.

Question 38

What are systemic risks?

Answer 38

These are defined as the potential for a major disruption in in the function of an entire market or financial system.

Question 39

How is hazard risk defined?

Answer 39

Risks that arise from property, liability or personnel loss exposures and are generally the subject of insurance.

Question 40

What is operational risk?

Answer 40

Risks that fall outside the hazard risk category and arise from people or a failure in processes, systems, or controls, including information technology.

Question 41

What do financial risks arise from?

Answer 41

The effect of market forces on financial assets or liabilities and include market risk, credit risk, liquidity risk and price risk.

Question 42

Where do strategic risks arise from?

Answer 42

Trends in the economy and society, including changes in the economic, political and competitive environments as well as from demographic shifts.

Question 43

Hazard and operational risks are classified as____ risks.

Answer 43

Pure risks

Question 44

Financial and strategic risks are classified as ____ risks.

Answer 44

Speculative risks

Question 45

What are the components for the process of the risk management framework cycle? (Hint - SIATM)

Answer 45

Scan the environment
Identify risks
Analyze risks
Treat risks
Monitor and review

Question 46

What is the risk management framework?

Answer 46

A foundation for applying the risk management process throughout the organization.

Question 47

What is risk criteria?

Answer 47

Information used as a basis for measuring the significance of a risk.

Question 48

Risk criteria should be aligned with the organization’s objectives, resources, risk management policy and should consider which factors? (Hint - CEMTMA)

Answer 48

Causes
Effects
Metrics used to measure effects of risk
Timeframe of potential risk
Methods to determine level of risk
Approach to combinations of risk.

Question 49

What are the key purposes of monitoring risk?

Answer 49

1. Determine the effectiveness of controls.
2. Obtain information to improve risk assessment.
3. Analyze events and their consequences to understand trends, successes and failures.
4. Observe changes in internal and external environments.
5. Identify emerging risks.