BUSFIN 3300 Exam 1 (Ch. 1-9) Questions And Complete Solutions
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Course
BUSFIN 3300
Institution
BUSFIN 3300
Risk - Correct Answer Uncertainty concerning the occurrence of a loss
Pure Risk - Correct Answer A situation in which there are only the possibilities of loss or no loss
What types of risk does insurance deal with? - Correct Answer Pure Risk
Diversifiable Risk
Accidental Risk
Specu...
BUSFIN 3300 Exam 1 (Ch. 1-9) Questions And Complete
Solutions
Risk - Correct Answer Uncertainty concerning the occurrence of a loss
Pure Risk - Correct Answer A situation in which there are only the possibilities of loss or no loss
What types of risk does insurance deal with? - Correct Answer Pure Risk
Diversifiable Risk
Accidental Risk
Speculative Risk - Correct Answer A situation in which either profit or loss is possible (ex. buying
common stock, betting)
Diversifiable Risk - Correct Answer Affects only individuals or small groups and not the entire
community (ex. Car theft)
Nondiversifiable Risk - Correct Answer affects the entire economy or large numbers of persons or
groups within the economy (hurricane). It is also called fundamental risk.
Enterprise Risk - Correct Answer encompasses all major risks faced by a business firm, which include:
pure risk
speculative risk
strategic risk
operational risk
financial risk
Strategic Risk - Correct Answer uncertainty regarding the firm's financial goals and objectives
,Operational Risk - Correct Answer results from the firm's business operations; people or procedures not
doing what they are supposed to do
Financial Risk - Correct Answer uncertainty of loss because of adverse changes in commodity prices,
interest rates, foreign exchange rates, and the value of money
Enterprise Risk Management - Correct Answer combines into a single unified treatment program all
major risks faced by the firm; can reduce overall risk
Systemic Risk - Correct Answer The risk of collapse of an entire system or entire market due to the
failure of a single entity or group of entities that can result in the breakdown of the entire financial
system
Loss Exposure - Correct Answer Any situation or circumstance in which a loss is possible, regardless of
whether a loss occurs
Objective Risk - Correct Answer The relative variation of actual loss from expected loss
Can be statistically calculated by some measure of dispersion, such as standard deviation
Objective risk declines as the number of exposure units increases
Subjective Risk - Correct Answer uncertainty based on a person's mental condition or state of mind
Law of Large Numbers - Correct Answer states that as the number of exposure units increases, the
more closely the actual loss experience will approach the expected loss experience
Objective Probability - Correct Answer 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
Can be determined in 2 ways:
- deductive reasoning: probability of getting a heads from a single coin flip is 1/2
, - inducting reasoning: probability a 21 year old will die before 26
Subjective Probability - Correct Answer the individual's personal estimate of the chance of loss
Chance of Loss - Correct Answer the probability that an event that causes a loss will occur
The chance of loss may be identical for 2 different groups, but the objective risk may be different
Peril - Correct Answer The cause of loss
Hazard - Correct Answer A condition that creates or increases frequency or severity of loss
Physical Hazard - Correct Answer a physical condition that increases the frequency or severity of loss
(ex. icy roads)
Moral Hazard - Correct Answer dishonesty or character defects in an individual that increase the
frequency or severity of loss (ex. insurance fraud; burning down your own business)
Attitudinal Hazard (Morale Hazard) - Correct Answer carelessness or indifference to a loss, which
increases the frequency or severity of a loss
(ex. leaving keys in unlocked car)
Legal Hazard - Correct Answer characteristics of the legal system or regulatory environment that
increase the frequency or severity of losses
Direct Loss - Correct Answer a financial loss that results from the physical damage, destruction, or theft
of the property
Indirect Loss/Consequential Loss - Correct Answer A financial loss that results indirectly from the
occurrence of a direct physical damage or theft loss (ex. additional living expenses after a fire)
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