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Fin 342 Exam 1 Questions With Precise Answers 2024|2025
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Fin 342 Exam 1 Questions With Precise Answers 2024|2025
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Fin 342 Exam 1 Questions With PreciseAnswers 2024|2025
What is risk management? what is risk? CORRECT ANSWERS Risk- A situation in
which the decision maker is able to estimate the likelihood of certain outcomes
Risk Management- is a process that identifies loss exposures faced by an organization
and selects the most appropriate techniques for treating such exposures
Loss exposure- is any situation or circumstance in which a loss is possible regardless of
whether a loss actually occurs
Steps in the risk management process (with application examples) CORRECT
ANSWERS 1) Identify Loss exposures: need to understand internal and external factors
that affect the business. Typical risk identification tools: Flow charts, financial statement,
historical loss data, physical inspection, etc. Some loss exposures include: property risk,
legal regulatory risks, human resources and employee benefits, business income loss
exposures.
2) Measure and analyze the risks (frequency and severity: requires higher level
analytical skills, excel modeling, simulation, econometrics. goal- accurate forecast of
expected loss, estimate the likelihood of the loss event (frequency) and estimate dollar
cost if the loss event occurs (severity), estimate impact on the firm.
3) Select appropriate risk management tools: Risk control- Avoidance (outsource),
Prevention: reduce the frequency of loss occurrence (safety equipment), Reduction:
reduce the severity of a loss after it occurs (sprinklers). Transfer risk- non insurance
transfer (contracts, hedging), Financing (insurance. Retention- when a firm keeps the
risk and pays for the losses as they occur, reduced insurance costs.
4) Implement the risk management program: do so by mapping either: plot risks by
expected frequency and severity or plot the risks based on current or future methods for
managing them
5) Continually monitor and revise as needed
What types of risks are businesses subject to CORRECT ANSWERS -Property risk
-Legal/regulatory risks
-Human resources and employee benefits
-Business income loss exposures.
Difference between pure risks and other risks CORRECT ANSWERS Pure risk- is
defined as a situation in which there are only the possibilities of Adverse (loss) or
Neutral (no loss) ex. Death, job related accidents, catastrophic medical expenses, fire
and flood damage.
Other risks: includes things like crime exposures, human resources exposures, foreign
loss exposures, and intangible property exposures. (Speculative risk- is defined as a
situation in which either profit or loss is possible)
, Types of Pure risks CORRECT ANSWERS -Type of pure risk include: premature death,
job related accidents, catastrophic medical expenses, and damage to property from fire,
lightning, flood or earthquakes.
Direct Versus Indirect losses (with application examples) CORRECT ANSWERS Direct
loss- is defined as financial loss that results from the physical damage destruction, or
theft of the property. Ex. If you own a home that is damaged by a fire, the physical
damage to the home is a direct loss
Indirect or consequential loss- is a financial loss that results indirectly form the
occurrence of a direct physical damage or theft loss.
RM methods and examples of each, what frequency severity combinations each might
be most appropriate for? CORRECT ANSWERS RM methods include risk control,
transfer risk and retention
SEVERITY
FREQUENCY LOW High
RARE Who cares? Add-on coverage
LOW Retention transfer-Insurance
HIGH Retention +Risk Control Avoidance Risk Control
Objectives of RM, Pre and Post loss CORRECT ANSWERS Post Loss objectives:
objectives include survival of the firm, continued operations, stability of earnings,
continued growth, and social responsibility- minimize the effects that a loss will have on
other persons and on society
Pre-lost objectives: objectives before a loss occurs include profitability and growth,
prepare for potential losses in the most economical way, reduction of anxiety, and
meeting legal obligations
Contribution of RM to the value of the firm: CORRECT ANSWERS -can attain its pre-
loss and post-loss objectives more easily
-cost of risk reduced, increasing company profit
-can properly treat pure and speculative loss exposures
-reduces indirect and direct losses -> reducing society pain and suffering
Relationship of social responsibility to RM CORRECT ANSWERS RM objective of
social responsibility is to minimize the effects that a loss will have on other persons and
on society, A severe loss can adversely affect employees, suppliers, customers,
creditors, and the community in general
Components of the cost of risk (with application example): CORRECT ANSWERS Cost
of risk: is a risk management tool that measures certain costs. These costs include:
premiums paid, retained losses, loss control expenditures, outside risk management
services, financial guarantees, internal administrative costs, taxes and fees
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