RMI 211 Exam 1 Study Guide Questions
With Correct Answers
Uncertainty concerning the occurrence of an event (usually a loss) - answer✔✔risk
used in situations where such probabilities cannot be estimated - answer✔✔uncertainty
Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs -
answer✔✔Loss Exposure
- defined as the relative variation of actual loss from expected loss
- It can be statistically calculated by some measure of dispersion, such as the standard deviation -
answer✔✔Objective Risk
defined as uncertainty based on a person's mental condition or state of mind -
answer✔✔Subjective (perceived) risk
The probability that an event will occur - answer✔✔Chance of loss
refers to 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 - answer✔✔Objective
Probability
the individual's personal estimate of the chance of loss - answer✔✔subjective probability
defined as the cause of the loss. - answer✔✔peril
a condition that increases the chance of loss - answer✔✔Hazard
a physical condition that increases the frequency or severity of loss - answer✔✔Physical hazard
dishonesty or character defects in an individual that increase the frequency or severity of loss -
answer✔✔Moral hazard
carelessness or indifference to a loss, which increases the frequency or severity of a loss -
answer✔✔Attitudinal Hazard (Morale Hazard)
refers to characteristics of the legal system or regulatory environment that increase the frequency
or severity of losses - answer✔✔Legal Hazards
a situation in which there are only the possibilities of loss or no loss (earthquake) -
answer✔✔Pure Risk
a situation in which either profit or loss is possible (gambling) - answer✔✔Speculative Risk
affects only individuals or small groups (car theft). It can be reduced or eliminated by
diversification. - answer✔✔diversifiable risk
affects the entire economy or large numbers of persons or groups within the economy
(hurricane). It is also called fundamental risk. - answer✔✔nondiversifiable risk
encompasses all major risks faced by a business firm, which include: pure risk, speculative risk,
strategic risk, operational risk, and financial risk. - answer✔✔Enterprise Risk
refers to uncertainty regarding the firm's financial goals and objectives. - answer✔✔Strategic
Risk
results from the firm's business operations. - answer✔✔Operational Risk
refers to the uncertainty of loss because of adverse changes in commodity prices, interest rates,
foreign exchange rates, and the value of money. - answer✔✔financial risk
combines into a single unified treatment program all major risks faced by the firm -
answer✔✔Enterprise Risk Management
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 -
answer✔✔Systematic Risk
are risks that directly affect an individual or family. - answer✔✔Personal Risk
involve the possibility of losses associated with the destruction or theft of property -
answer✔✔Property Risk
a financial loss that results from the physical damage, destruction, or theft of the property, such
as fire damage to a home - answer✔✔Direct Loss
a financial loss that results indirectly from the occurrence of a direct physical damage or theft
loss (e.g., the additional living expenses after a fire) - answer✔✔Indirect Loss
possibility of being held legally liable for bodily injury or property damage to someone else -
answer✔✔Liability Risk
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