RMIN 4000 Uga Test 1 With Complete Solutions
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Types of risk - correct answers -pure risk
-speculative risk
-diversifiable risk
-nondiversifiable risk
-enterprise risk
-systemic risk
risk - correct answers uncertainty concerning the occurrence of a loss
uncertainty - correct answers probabilities cannot be estimated
loss exposure - correct answers any situation or circumstance in which a loss is possible, regardless of whether a loss
actually occurs
example: earthquake or flood causing damage to a manufacturing plant
objective risk (degree of risk) - correct answers the relative variation of actual loss from expected loss
example:10,000 houses insured of a long period of time and on average 100 houses burn each year, however it would be
rare for exactly 100 to burn each year
law of large numbers - correct answers as the number of exposure units increases, the more closely the actual loss
experience will approach the expected loss experience
example: as the number of homes under observation increases, the greater is the degree of accuracy in predicting the
proportion of homes that will burn
subjective risk (perceived risk) - correct answers uncertainty based on a person's mental condition or state of mind
, example: driver with previous convictions for drunk driving tries to drive home and wonders if he will get arrested by the
police or not
chance of loss - correct answers the probability that an event will occur
objective probability - correct answers the long run relative frequency of an event based on the assumptions of an
infinite number of observations and of no change in the underlying conditions
two ways objective probability can be determined - correct answers 1) deductive reasoning (priori probabilities):
probability of getting a head from the toss of a perfectly balanced coin is 1/2 bc there are two sides
2) inductive reasoning: the probability that a person age 21 will die before age 26 cannot be logically deduced, life
insurers can estimate the probability of death and sell a 5 year life insurance policy for a 21 yr old
subjective probability - correct answers the individual's personal estimate of the chance of loss
example: people who buy a lottery ticket on their birthday may believe it is their lucky day and overestimate the small
chance of winning
objective risk - correct answers the relative variation of actual loss from expected loss
peril - correct answers the cause of loss
example: house burns down, peril is the fire
hazard - correct answers condition that creates or increases the frequency or severity of loss
4 types of hazards - correct answers 1) physical hazard
2) moral hazard
3) attitudinal hazard
4) legal hazard
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