Chapter 11 -Risk management

Question 1

Which of the following approaches could be used to reduce the riskiness of capital investment projects ?

• Favour projects with low standard deviations
• Set a maximum payback period
• Use a low discounting rate
• Favour projects with high expected net present values

Answer 1

• Favour projects with a low standard deviations

- set a maximum payback period

Question 2

A company is faced with a risk that has probability of occurring and a low negative impact if it occur. Which of the following strategies is likely to be best suited to dealing with this risk?

• Transfer
• Avoid
• Accept
• Reduce

Answer 2

Reduce

Question 3

Match the following risks to the descriptions.
1. Pure
2. Fundamental
3. Speculative
4. Particular
A. Risks from which good or harm may result
B. Risks over which an individual has some measure of control
C. Risks that affect society in general
D. Risk whose only outcome is to harm

Answer 3

A (3)
B (4)
C (2)
D (1)

Question 4

Political risk analysis is conducted by a company considering international operations and normally focuses on:

• The world political situation generally
• international relations between the major industrialised powers
• Political and cultural differences between the home and target country
• the industrialisation of the target country

Answer 4

• Political and cultural differences between the home and target country

Question 5

Which of the following would normally be classified as an operational risk?

• The sales and marketing Director leaving to join a competitor
• a merger between two competitors
• A breakdown of new information systems
• economic recession restricting the amount of bank lending
• stricter health and safety legislation forcing changes in production process

Answer 5

• the sales and marketing Director leaving to join a competitor
• a breakdown of the information system

Question 6

Which of the following is normally classed as a strategic risk?

• A permanent worldwide shortage of a raw material that the business uses
• one of the business’s third largest customer transferring it’s business to a competitor
• a major fraud by finance staff
• a competitor introducing new technology into its production process

Answer 6

• A permanent worldwide shortage of raw material that the business uses
• A competitor introducing new technology into its production process

Question 7

Which of the following are likely to be issues for an organisation that gains a reputation for poor ethical behaviour ?

• inability to recruit staff
• Supplier and customer unwillingness to deal with the organisation
• Reduced compliance costs
• Increased public relations costs
• Loss of market value because of a fall in investor confidence

Answer 7

• inability to recruit staff
• supplier and customer unwillingness to deal with the organisation
• increased public relations costs
• loss of market value because of a fall in investor confidence

Question 8

Which of the following is the best indicator of the risk/ return trade off?

• expected value
• probability of making a loss
• standard deviation of expected returns
• range of outcomes

Answer 8

Standard deviation of expected returns