Topic 2: RM Foundations

Question 1

What is the difference between pure and speculative risk?

Answer 1

pure: 2 possible “future states of the world” (loss or no loss)

speculative: 3 possible “future states of the world” (gain, loss, or neither)

Question 2

What is the difference between subjective and objective risk?

Answer 2

subjective: the perceived amount of risk based on opinion / attitude

objective: measurable variation of actual outcomes versus expenses outcomes

Question 3

What is the difference between static and dynamic risk?

Answer 3

static: always present, doesn’t change

dynamic: changing circumstances, laws, or conditions; new and emerging trends

Question 4

What is the difference between diversifiable and non-diversifiable risk?

Answer 4

diversifiable: only affect specific individuals or businesses

non-diversifiable: affect large groups of people/society at the same time (many companies or intire industry)

Question 5

List the steps in the risk management process.

Answer 5

1. identify risks
2. analyze risks
3. treat risks
4. select risk treatment options
5. monitor and review

Question 6

What are the six basic measures of risk?

Answer 6

exposure
likelihood/frequency
consequences/severity
time horizon
correlation
volatility

Question 7

What are the three elements of exposure?

Answer 7

1. asset exposed to loss
2. cause of loss
3. financial consequences of said loss

Question 8

What happens when value of exposure increases?

Answer 8

level of risk increases

Question 9

What happens as the time horizon increases?

Answer 9

level of risk increases

Question 10

Describe volatility/its use.

Answer 10

basic measure of deviation between actual and expected risk