RMI 300 Final Exam ACTUAL Exam Questions and CORRECT Answers
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Course
RMI 300
Institution
RMI 300
RMI 300 Final Exam ACTUAL Exam
Questions and CORRECT Answers
Framing- How to mitigate the Bias - CORRECT ANSWER- is the way we define the
decision to be made. Think of a picture frame, which is a lens through which we see the
situation. Some qualities are inside and some outside.
-Restate/r...
RMI 300 Final Exam ACTUAL Exam
Questions and CORRECT Answers
Framing- How to mitigate the Bias - CORRECT ANSWER✔✔- is the way we define the
decision to be made. Think of a picture frame, which is a lens through which we see the
situation. Some qualities are inside and some outside.
-Restate/reframe the issue before making a decision.
-Work towards neutral representations.
-Recognize the influence of gains versus losses; most effective concessions are those that
reduce the opponents losses, not improve an attribute in which the opponent is already "in the
gains."
Retrievability/Availability: - CORRECT ANSWER✔✔- People assess the frequency,
probability, or likely causes of an event by the degree to which instances of that event are
readily "available" in memory
Anchoring: - CORRECT ANSWER✔✔- People start with an implicitly suggested reference
point (the "anchor") and make adjustments to it to reach their estimate. A person begins with
a first approximation (anchor) and then makes adjustments to that number based on
additional information.
Bounded Awareness: - CORRECT ANSWER✔✔- The phenomenon by which individuals do
not "see" and use accessible and perceivable information during the decision-making process,
while "seeing" and using other equally accessible and perceivable information
Firm Value - CORRECT ANSWER✔✔- -present value of expected cash flow
-Firm value is determined by expected cash flows(earnings) and required rate of return :
expected return could earn on the next best investment(affected by time and risk)
Time Effect: - CORRECT ANSWER✔✔- preference for cash (to make investment) today
rather than in the future
- the longer the duration until payment, the lower the value today
, Risk Preference - CORRECT ANSWER✔✔- preference for less risk rather than more risk
all else equal
Firms Total Risk - CORRECT ANSWER✔✔- A. Diversifiable (idiosyncratic, non-
systematic) "basket of assets"
B. Non-Diversifiable (also called market or systematic) - can't use the law of large numbers
to reduce this.
KEY IDEA- individual investors can pool away diversifiable risk in exactly the same way
that the insurers take advantage of pooling, and pooling is ineffective for non-diversifiable
risk. Therefore, RM for firms owned by well diversified investors can only increase firm
value by increasing net cash flow
being efficient adds value- why do firms buy insurance - CORRECT ANSWER✔✔- - not
pooling- only other option is increasing expected CF
1.Insurer sometimes offers services more efficiently
(loss control, claims admin, investment, other)
2. Costs associated with financial distress might be reduced
3. Raising new funds may be less costly
-cost of obtaining new funds through issuing bonds, stocks, or getting a loan
-costs of using existing funds may take away from productive investments
4. tax payments may be delayed(and insurers can deduct reserves where as insured cannot)
Reinsurance - CORRECT ANSWER✔✔- insurance purchased by primary insurers to
transfer (cede) risk associated with their insurance business.
** if you were to keep following this chain"retrocession"
What reinsurance does - CORRECT ANSWER✔✔- reinsurance can increase net cash flow if
less costly than other forms of capital(insurer in Asia and Africa pool their risks)
1. increase the number of observations and reduce the size of each loss to individual insurer
2. lessen the level of positive correlation by sharing in different regions/domains
3. split single large valued exposure into multiple exposures (Lloyd's)
***add value by providing services, including evaluation of underlying insurers
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