2. Which of the following is not considered part of business risk? A. Price risk C. Pure risk B. Credit risk D. Longevity risk
3. All of the following are types of price risk except A. commodity price risk. B. exchange rate risk. C. stock market risk. D. interest rate risk. Introduction to Risk Management
4. Which of the following is the definition of credit risk? A. Uncertainties due to possible changes in input prices B. The risk that parties to which the firm has lent money will default C. The risk that a firm won’t be able to get credit from lenders D. The risk that a firm won’t have sufficient funds to make payments to its creditors
5. Gallagher Winery is attempting to identify its pure risks. Which of the following is an example of an indirect loss for Gallagher? A. Loss of grapevines due to hail B. Employee health problems due to insecticide usage C. Loss of profit due to bad publicity about a liability claim D. Cost of replacing equipment after a fire
6. By increasing spending on safety equipment, Charley’s Meat Packing has reduced total worker injury costs by 15%. This is an example of the A. tradeoff between loss control costs and loss financing. B. importance of loss control. C. tendency of business firms to spend too little on loss control. D. tradeoff between loss control costs and expected direct losses.
7. Which one of following is not a major method of managing risk? A. Loss identification C. Loss financing B. Loss control D. Internal risk reduction
8. Which of the following is incorrect? A. Value with risk = Value without risk – Cost of risk B. Value without risk – Value with risk = Cost of risk C. Less variability = More risk D. Greater variability = Greater risk
9. Which of the following statements is correct? A. There are no efficient or optimal levels of risk. B. There are efficient or optimal levels of risk. C. Risk is less costly than the cost associated with the management of risk. D. Risk can’t be effectively managed.
10. All of the following are important components of the cost of risk for a pharmaceutical company that’s developing a new prescription drug for the treatment of AIDS, except the cost of A. testing the product for safety. B. defending against and settling future liability claims. C. product liability insurance. D. marketing the product to doctors. Examination, Lesson 1 25
11. Which of the following statements is true of book value? A. It has little or no correspondence to economic value. B. It’s often relevant for risk management purposes. C. It’s often used for pricing insurance. D. It’s based on historical cost.
12. Assume that the following probability distribution exists for automobile damages: What is the expected value for damages? A. $12.40 C. $1,240 B. $124 D. $12,400
13. Which of the following statements is true of random variables? A. They have a certain outcome. B. They have an uncertain outcome. C. They may have a certain or an uncertain outcome. D. Outcome certainty or uncertainty doesn’t apply to random variability.
14. A listing of a random variable’s possible outcomes and the respective probabilities of those outcomes is called the A. probability distribution. C. standard deviation. B. expected value. D. correlation.
15. Which of the following statements is true about expected value? A. It’s used to determine the value of a company’s assets. B. It uses the probability distribution to develop information about where outcomes are unlikely to occur, on average. C. It focuses on providing information about where outlier or extreme ranges of outcomes may occur. D. It provides information about where outcomes tend to occur, on average