Chapter Ten Principles of Risk Management This chapter contains 30 multiple choice questions,10 short problems,and 5 longer problems. Multiple Choice 1. that"matters"because if affects people's welfare. exists whenever one does not know for sure what will occur in the future. (a)Uncertainty is risk;Uncertainty (b)Risk is uncertainty;Uncertainty (c)Risk is uncertainty;Risk (d)Uncertainty is risk;Risk Answer:(b) 2. is a measure of willingness to pay to reduce one's exposure to risk. (a)Risk aversion (b)Risk avariciousness (c)Risk predilection (d)Risk inflation Answer:(a) 3.When choosing among investment alternatives with the same expected rate of return,a risk averse individual chooses the one with the risk. (a)surest (b)most uncertain (c)lowest (d)highest Answer:(c) 10-1
10-1 Chapter Ten Principles of Risk Management This chapter contains 30 multiple choice questions, 10 short problems, and 5 longer problems. Multiple Choice 1. ________ that “matters” because if affects people's welfare. ________ exists whenever one does not know for sure what will occur in the future. (a) Uncertainty is risk; Uncertainty (b) Risk is uncertainty; Uncertainty (c) Risk is uncertainty; Risk (d) Uncertainty is risk; Risk Answer: (b) 2. ________ is a measure of willingness to pay to reduce one's exposure to risk. (a) Risk aversion (b) Risk avariciousness (c) Risk predilection (d) Risk inflation Answer: (a) 3. When choosing among investment alternatives with the same expected rate of return, a risk averse individual chooses the one with the ________ risk. (a) surest (b) most uncertain (c) lowest (d) highest Answer: (c)
4. is a particular type of risk people face because of the nature of their business or pattern of consumption. (a)Operational efficiency exposure (b)Opportunity exposure (c)Risk exposure (d)Risk reduction Answer:(c) 5 are investors who take positions that increase their exposure to certain risks in the hope of increasing their wealth. (a)Operations insurers (b)Foreign exporters (c)Hedgers (d)Speculators Answer:(d) 6.The riskiness of an asset or a transaction be assessed in isolation or in the abstract. (a)can (b)cannot (c)must (d)it varies according to the situation Answer:(b) 7.By definition, are investors who take positions to reduce their exposures. (a)operations insurers (b)foreign exporters (c)hedgers (d)speculators Answer:(c) 10-2
10-2 4. ________ is a particular type of risk people face because of the nature of their business or pattern of consumption. (a) Operational efficiency exposure (b) Opportunity exposure (c) Risk exposure (d) Risk reduction Answer: (c) 5. ________ are investors who take positions that increase their exposure to certain risks in the hope of increasing their wealth. (a) Operations insurers (b) Foreign exporters (c) Hedgers (d) Speculators Answer: (d) 6. The riskiness of an asset or a transaction ________ be assessed in isolation or in the abstract. (a) can (b) cannot (c) must (d) it varies according to the situation Answer: (b) 7. By definition, ________ are investors who take positions to reduce their exposures. (a) operations insurers (b) foreign exporters (c) hedgers (d) speculators Answer: (c)
8.The risk of loss arising from obsolescence due to technological change or changes in consumer taste is an example of (a)unemployment risk (b)liability risk (c)financial-asset risk (d)d consumer-durable asset risk Answer:(d) 9.The risk arising from holding different kinds of financial assets such as equities or fixed income securities denominated in one or more currencies is an example of (a)unemployment risk (b)liability risk (c)financial-asset risk (d)consumer-durable asset risk Answer:(c) 10.Business risks of the firm are borne by its (a)shareholders (b)creditors (c)employees (d)all of the above Answer:(d) 11. consists of figuring out what the most important risk exposures are for the unit of analysis. (a)Risk assessment (b)Selection of risk management techniques (c)Implementation (d)Risk identification Answer:(d) 10-3
10-3 8. The risk of loss arising from obsolescence due to technological change or changes in consumer taste is an example of ________. (a) unemployment risk (b) liability risk (c) financial-asset risk (d) d consumer-durable asset risk Answer: (d) 9. The risk arising from holding different kinds of financial assets such as equities or fixed income securities denominated in one or more currencies is an example of ________. (a) unemployment risk (b) liability risk (c) financial-asset risk (d) consumer-durable asset risk Answer: (c) 10. Business risks of the firm are borne by its ________. (a) shareholders (b) creditors (c) employees (d) all of the above Answer: (d) 11. ________ consists of figuring out what the most important risk exposures are for the unit of analysis. (a) Risk assessment (b) Selection of risk management techniques (c) Implementation (d) Risk identification Answer: (d)
12.Which of the following is most likely to need a lot of life insurance? (a)a single person with no dependents (b)a divorced person with no dependents (c)a double-income couple with no kids (d)married person with children Answer:(d) 13. is the quantification of the costs associated with the risks that have been identified in the first step of risk management. (a)Risk assessment (b)Selection of risk management techniques (c)Implementation (d)Review Answer:(a) 14.Selling a risky asset to someone else and buying insurance are examples of (a)risk avoidance (b)loss prevention and control (c)risk transfer (d)risk retention Answer:(c) 15.One is said to a risk when the action taken to reduce one's exposure to a loss also causes one to give up the possibility of a gain. (a)insure (b)diversify (c)hedge (d)pay a premium with Answer:(c) 10-4
10-4 12. Which of the following is most likely to need a lot of life insurance? (a) a single person with no dependents (b) a divorced person with no dependents (c) a double-income couple with no kids (d) married person with children Answer: (d) 13. ________ is the quantification of the costs associated with the risks that have been identified in the first step of risk management. (a) Risk assessment (b) Selection of risk management techniques (c) Implementation (d) Review Answer: (a) 14. Selling a risky asset to someone else and buying insurance are examples of ________. (a) risk avoidance (b) loss prevention and control (c) risk transfer (d) risk retention Answer: (c) 15. One is said to ________ a risk when the action taken to reduce one’s exposure to a loss also causes one to give up the possibility of a gain. (a) insure (b) diversify (c) hedge (d) pay a premium with Answer: (c)
16.When you you pay a premium to eliminate the risk of loss and retain the potential for gain. (a)insure (b)diversify (c)hedge (d)speculate Answer:(a) 17.In order for diversification to reduce your risk exposure,the risks must be (a)less than perfectly correlated with each other (b)more than perfectly correlated with each other (c)uncorrelated (d)none of the above Answer:(a) 18.The demand for ways to manage risk has been increased by (a)increased volatility of exchange rates (b)increased volatility of interest rates (c)increased volatility of commodity prices (d)all of the above Answer:(d) 19.Moral hazard and adverse selection are examples of (a)transactions costs (b)incentive problems (c)transference costs (d)both a and b Answer:(b) 10-5
10-5 16. When you ________ you pay a premium to eliminate the risk of loss and retain the potential for gain. (a) insure (b) diversify (c) hedge (d) speculate Answer: (a) 17. In order for diversification to reduce your risk exposure, the risks must be ________ (a) less than perfectly correlated with each other (b) more than perfectly correlated with each other (c) uncorrelated (d) none of the above Answer: (a) 18. The demand for ways to manage risk has been increased by ________. (a) increased volatility of exchange rates (b) increased volatility of interest rates (c) increased volatility of commodity prices (d) all of the above Answer: (d) 19. Moral hazard and adverse selection are examples of ________. (a) transactions costs (b) incentive problems (c) transference costs (d) both a and b Answer: (b)