condition that increases the chance of loss.

Management: Multiple Choice Questions

Multiple Choice Questions Chapter 1 1. The term “hazard” refers to (a) the same thing as the term…

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Multiple Choice Questions Chapter 1

1. The term “hazard” refers to

(a) the same thing as the term peril.

(b) a condition that increases the chance of loss.

(c) uncertainty regarding loss.

(d) the same thing as probability of loss.

2. From the viewpoint of society and the economy, the most desirable means of dealing with risk is

(a) transfer.

(b) retention.

(c) loss prevention.

(d) sharing.

3. Hazards are usually classified into three categories. They are:

(a) perils, risks, and uncertainties.

(b) physical, mental, and moral.

(c) moral, morale, and physical.

(d) personal, property, and liability.

4. To be technically correct, we should define “fire” as

(a) a peril.

(b) a hazard.

(c) a risk.

(d) any of the above is equally correct.

5. Pure risk is characterized by

(a) a chance of loss and a chance of gain.

(b) a chance of loss or no loss only.

(c) the chance of gain or no loss only.

(d) none of the above.

6. The distinction between fundamental and particular risks is important because

(a) normally only particular risks are insurable.

(b) whether a risk is fundamental or particular may determine how society will deal with it.

(c) fundamental risks are a source of gain to society.

(d) none of the above.

7. The possibility of loss resulting from a flood is an example of

(a) a static fundamental risk.

(b) a dynamic fundamental risk.

(c) a static particular risk.

(d) a dynamic particular risk.

8. Unemployment would generally be considered to be

(a) a static fundamental risk.

(b) a dynamic fundamental risk.

(c) a static particular risk.

(d) a dynamic particular risk.

9. The definition of “risk” suggested in the text views risk as

(a) a condition of the real world.

(b) a state of mind.

(c) subjective uncertainty.

(d) none of the above.

10. A peril, as distinguished from a hazard, is defined as

(a) a condition that increases the likelihood of loss.

(b) the cause of a loss.

(c) the same thing as risk.

(d) none of the above.

11. A business firm with an inventory of obsolete stock and high notes payable might represent

(a) a moral hazard.

(b) a morale hazard.

(c) a legal hazard.

(d) none of the above.

12. Pure risks are generally classified as

(a) physical risks, moral risks, and morale risks.

(b) fundamental risks, dynamic risks, and particular risks.

(c) speculative risks, enterprise risks, and financial risks.

(d) personal risks, property risks, liability risks, and risks arising out of the failure of others.

13. Because she knows she has insurance to cover losses from theft, Jones rarely locks the door to her house. Her behavior is an example of

(a) moral hazard.

(b) morale hazard.

(c) physical hazard.

(d) none of the above.

14. A fire caused $50,000 damage to Smith’s house, and the family was forced to spent $10,000 to live in rented housing while it was being repaired. Which of the following best describes Smith’s loss?

(a) direct property loss of $60,000

(b) direct property loss of $50,000, uninsured loss of $10,000

(c) direct property loss of $50,000, indirect property loss of $10,000

(d) direct property loss of $50,000, liability loss of $10,000

15. In property insurance terminology, all the following are considered hazards except:

(a) a fire which is started in a waste paper basket.

(b) a steam iron left on unattended.

(c) matches left within reach of small children.

(d) oily rags stored near a heater.

16. Pure risk is considered distasteful by most persons because

(a) it can be a source of worry and concern.

(b) there is nothing you can do about it.

(c) most pure risks result in losses.

(d) none of the above.

17. The terrorist attack on the World Trade Center on September 11, 2001 led to a debate over whether such risks are

(a) dynamic or static.

(b) pure or speculative.

(c) fundamental or particular.

(d) none of the above.

18. The hazard that reflects the tendency in some jurisdictions for judges and juries to favor a plaintiff in litigation is properly classified as

(a) a moral hazard.

(b) a morale hazard.

(c) a legal hazard.

(d) none of the above.

19. Classify the following as pure or speculative risk:

(1) Change in market price for Farmer Smith’s crops

(2) Change in consumer demand for ABC’s products

(3) Collision damage to Jones’ care

(a) (1) speculative, (2) pure, (3) pure

(b) (1) speculative, (2) speculative, (3) pure

(c) (1) pure, (2) speculative, (3) pure

(d) none of the above

20. According to the FBI, the fastest growing form of white collar crime is.

(a) substance abuse.

(b) arson.

(c) identify theft.

(d) insurance fraud.

Multiple Choice Questions Chapter 21. Traditional risk management is concerned primarily with

(a) dynamic risks.

(b) pure risks.

(c) fundamental risks.

(d) speculative risks.

2. The evolution of risk management is traceable to

(a) the introduction of decision theory in business college curricula.

(b) systems safety in the aerospace program.

(c) the field of corporate insurance buying.

(d) all of the above.

3. Traditional risk management

(a) is synonymous with corporate insurance buying.

(b) draws on several other disciplines but is a distinct discipline and function.

(c) is somewhat narrower in scope than insurance management.

(d) more than one of the above.

4. The term enterprise risk management refers to

(a) management of risks related to derivatives and futures.

(b) management of financial risks

(c) integrated management of a firm’s pure and speculative risks.

(d) management of risks for profit-making organizations.

5. The risk that a firm’s IT systems will fail is an example of

(a) credit risk.

(b) operational risk.

(c) strategic risk.

(d) compliance risk.

6. Financial risk management encompasses management of

(a) operational risk, strategic risk, and credit risk

(b) credit risk, market risk, and liquidity risk

(c) compliance risk, credit risk, and strategic risk

(d) pure risk, speculative risk, and strategic risk

7. Henri Fayol’s place in the history of risk management arises from

(a) his introduction of the term “risk management.”

(b) his work in the field of systems safety.

(c) his work in the field of operations research.

(d) his recognition of risk management as one of six broad functions of business.

8. Which of the following techniques for dealing with risk may be said to represent a special variation of other techniques?

(a) reduction.

(b) sharing.

(c) transfer.

(d) retention.

9. Risk management contributes to organization profit

(a) by reducing the cost of losses.

(b) by allowing the organization to engage in certain speculative risks.

(c) by preserving the organization’s operating effectiveness.

(d) all of the above.

10. Involuntary retention occurs when

(a) the risk is not recognized.

(b) insurance does not cover the intended exposure.

(c) loss control measures are improperly implemented.

(d) all of the above.

11. Risk avoidance should be used in those instances in which

(a) no other alternative is available.

(b) the exposure has catastrophic potential and the risk cannot be reduced or transferred.

(c) when the frequency of loss is low.

(d) when the probability or frequency cannot be determined.

12. As it exists today, risk management represents the merging of the specialties

(a) insurance, actuarial science, and decision theory.

(b) loss prevention, loss control and loss financing.

(c) decision theory, risk financing, and risk control.

(d) Intuitive decisions, conventions, and instinctive reactions.

13. The type of retention that is always undesirable is

(a) unfunded retention.

(b) unintentional retention.

(c) voluntary retention.

(d) all forms of retention are undesirable.

14. The two broad approaches to dealing with risk are

(a) risk retention and risk transfer.

(b) risk avoidance and risk transfer.

(c) risk control and risk financing.

(d) insurance management and risk management.

15. Which of the following statements about risk management is correct?

(a) risk management has relevance for organizations of all sizes.

(b) risk management has an anti-insurance bias and seeks to minimize the use of insurance in dealing with risk.

(c) risk management is concerned primarily with the risk problems of giant corporations.

(d) risk management is a function of business and as such has little relevance for the individual.

16. The two most important of the pre-loss and post-loss objectives are

(a) meeting social responsibility and meeting external obligations.

(b) continued growth and earning stability.

(c) survival and economy.

(d) earning stability and reduction in anxiety.

17. The step in the risk management process that is most likely to be overlooked is

(a) determination of objectives.

(b) risk identification.

(c) evaluating risks.

(d) selection of the risk treatment device.

18. The most difficult step in the risk management process is likely to be

(a) determination of objectives.

(b) risk identification.

(c) evaluating risks.

(d) selection of the risk treatment device.

19. A risk management policy statement

(a) provides a framework within which the risk manager may make decisions.

(b) should permit the risk manager some latitude.

(c) should be a product of the board of directors with advice from the risk manager.

(d) all of the above.

20. The ultimate goal of risk management is to

(a) minimize insurance expenditures.

(b) make certain that uninsured losses do not occur.

(c) minimize the adverse effects of losses and uncertainty connected with risks.

(d) eliminate financial loss.

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