Chapter 1 Risk And It's Treatment

Question 1

Traditional definition of Risk

Answer 1

Uncertainty concerning the occurrence of a loss

Question 2

In Economics and Finance, the term Risk is used to describe what?

Answer 2

Situations where the probabilities of possible outcomes are known

Question 3

Uncertainty describes what?

Answer 3

Situations where probabilities of possible outcomes cannot be estimated

Question 4

Loss Exposure

Answer 4

Any situation or circumstance in which loss is possible, regardless of whether a loss occurs.

Question 5

Objective Risk

Answer 5

The relative variation of actual loss from expected loss. Can be calculated by some measure of dispersion (like Standard Deviation)

Question 6

Subjective Risk

Answer 6

Uncertainty based on a person’s mental condition or state of mind. Also called Perceived Risk.

Question 7

Chance of Loss

Answer 7

Probability of an event occurring

Question 8

Objective Probability

Answer 8

Long-term relative frequency of an event. This is based on the assumptions of an infinite number of observations, with no change in the underlying conditions.

Question 9

Subjective Probability

Answer 9

The person’s personal estimate of the chance of loss

Question 10

Peril

Answer 10

The cause of the loss

Question 11

Hazard

Answer 11

A condition that increases the chance of a loss

Question 12

The four types of hazards are:

Answer 12

Physical
Moral
Morale
Legal

Question 13

Pure Risk

Answer 13

Situations where there are only the possibilities of loss, without any gains

Question 14

Speculative Risk

Answer 14

Situations where either profit or loss is possible

Question 15

Diversifiable Risk

Answer 15

Risks that affect a small enough population so the risk can be reduced/eliminated by diversification.
Examples: car theft, home invasions, …

Question 16

Nondiversifiable Risk

Answer 16

A risk that affects either a large population or the entire economy. It’s too large to be managed by an insurance company alone, so usually the government steps in to help insure these risks.
Example: hurricanes and flooding insurance.

Question 17

Enterprise Risk

Answer 17

Any risks faced by a business firm,

Question 18

Enterprise Risk includes what five types of risk?

Answer 18

Strategic
Operational
Financial
Pure Risk
Speculative risk