Risk Management – Exam 1 (Chapters 1 & 2), 2026 – Study
Material and Practice Questions
1) Traditionally, risk has been defined as
A) any situation in which the probability of loss is one.
B) any situation in which the probability of loss is zero.
C) uncertainty concerning the occurrence of loss.
D) the probability of a loss occurring. - ANS✔✔ C) uncertainty concerning the occurrence of
loss.
2) Objective risk is defined as
A) the probability of loss.
B) the relative variation of actual loss from expected loss.
C) uncertainty based on a person's mental condition or state of mind.
D) the cause of loss. - ANS✔✔ B) the relative variation of actual loss from expected loss.
3) An insurance company estimates its objective risk for 10,000 exposures to be 10 percent.
Assuming the probability of loss remains the same, what would happen to the objective risk if
the number of exposures were to increase to 1 million?
A) It would decrease to 1 percent.
B) It would decrease to 5 percent.
C) It would remain the same.
D) It would increase to 20 percent. - ANS✔✔ A) It would decrease to 1 percent.
4) Uncertainty based on a person's mental condition or state of mind is known as
A) objective risk.
B) subjective risk.
,C) objective probability.
D) subjective probability. - ANS✔✔ B) subjective risk.
5) The long-run relative frequency of an event based on the assumption of an infinite number of
observations with no change in the underlying conditions is called
A) objective probability.
B) objective risk.
C) subjective probability.
D) subjective risk. - ANS✔✔ A) objective probability.
6) Which of the following statements about a priori probabilities is correct?
A) They are subjective probabilities based on ambiguity in the way probability is perceived.
B) They are subjective probabilities that may vary among individuals because of factors such as
age, gender, education, and the use of alcohol.
C) They are objective probabilities that can be determined by deductive reasoning.
D) They are objective probabilities that can be determined by subjective reasoning. - ANS✔✔ C)
They are objective probabilities that can be determined by deductive reasoning.
7) An individual's personal estimate of the chance of loss is a(n)
A) objective probability.
B) objective risk.
C) subjective probability.
D) a priori probability. - ANS✔✔ C) subjective probability.
8) A peril is
A) a moral hazard.
B) the cause of a loss.
, C) a condition that increases the chance of a loss.
D) the probability that a loss will occur. - ANS✔✔ B) the cause of a loss.
9) An earthquake is an example of a(n)
A) moral hazard.
B) peril.
C) physical hazard.
D) objective risk. - ANS✔✔ B) peril.
10) Dense fog that increases the chance of an automobile accident is an example of a
A) speculative risk.
B) peril.
C) physical hazard.
D) moral hazard. - ANS✔✔ C) physical hazard.
11) Faking an accident to collect insurance proceeds is an example of
A) physical hazard.
B) objective risk.
C) moral hazard.
D) attitudinal hazard. - ANS✔✔ C) moral hazard.
12) Carelessness or indifference to a loss is an example of
A) physical hazard.
B) objective probability.
C) moral hazard.
D) attitudinal hazard. - ANS✔✔ D) attitudinal hazard.
Material and Practice Questions
1) Traditionally, risk has been defined as
A) any situation in which the probability of loss is one.
B) any situation in which the probability of loss is zero.
C) uncertainty concerning the occurrence of loss.
D) the probability of a loss occurring. - ANS✔✔ C) uncertainty concerning the occurrence of
loss.
2) Objective risk is defined as
A) the probability of loss.
B) the relative variation of actual loss from expected loss.
C) uncertainty based on a person's mental condition or state of mind.
D) the cause of loss. - ANS✔✔ B) the relative variation of actual loss from expected loss.
3) An insurance company estimates its objective risk for 10,000 exposures to be 10 percent.
Assuming the probability of loss remains the same, what would happen to the objective risk if
the number of exposures were to increase to 1 million?
A) It would decrease to 1 percent.
B) It would decrease to 5 percent.
C) It would remain the same.
D) It would increase to 20 percent. - ANS✔✔ A) It would decrease to 1 percent.
4) Uncertainty based on a person's mental condition or state of mind is known as
A) objective risk.
B) subjective risk.
,C) objective probability.
D) subjective probability. - ANS✔✔ B) subjective risk.
5) The long-run relative frequency of an event based on the assumption of an infinite number of
observations with no change in the underlying conditions is called
A) objective probability.
B) objective risk.
C) subjective probability.
D) subjective risk. - ANS✔✔ A) objective probability.
6) Which of the following statements about a priori probabilities is correct?
A) They are subjective probabilities based on ambiguity in the way probability is perceived.
B) They are subjective probabilities that may vary among individuals because of factors such as
age, gender, education, and the use of alcohol.
C) They are objective probabilities that can be determined by deductive reasoning.
D) They are objective probabilities that can be determined by subjective reasoning. - ANS✔✔ C)
They are objective probabilities that can be determined by deductive reasoning.
7) An individual's personal estimate of the chance of loss is a(n)
A) objective probability.
B) objective risk.
C) subjective probability.
D) a priori probability. - ANS✔✔ C) subjective probability.
8) A peril is
A) a moral hazard.
B) the cause of a loss.
, C) a condition that increases the chance of a loss.
D) the probability that a loss will occur. - ANS✔✔ B) the cause of a loss.
9) An earthquake is an example of a(n)
A) moral hazard.
B) peril.
C) physical hazard.
D) objective risk. - ANS✔✔ B) peril.
10) Dense fog that increases the chance of an automobile accident is an example of a
A) speculative risk.
B) peril.
C) physical hazard.
D) moral hazard. - ANS✔✔ C) physical hazard.
11) Faking an accident to collect insurance proceeds is an example of
A) physical hazard.
B) objective risk.
C) moral hazard.
D) attitudinal hazard. - ANS✔✔ C) moral hazard.
12) Carelessness or indifference to a loss is an example of
A) physical hazard.
B) objective probability.
C) moral hazard.
D) attitudinal hazard. - ANS✔✔ D) attitudinal hazard.
