Risk Management – Exam 1 (Chapters 1–4), 2026 – Study Material and
Practice Questions
What is the definition of risk? - ANS✔✔ No single definition of risk.
Uncertainty concerning the occurrence of a loss.
Any situation where there is uncertainty about what outcome will occur.
Variation of outcomes.
What is loss exposure? - ANS✔✔ Any situation or circumstance in which a loss is possible,
regardless of whether a loss occurs.
What are the three different types of risk attitude? - ANS✔✔ 1. Risk Averse
2. Risk Neutral
3. Risk Taker (Lover)
What is a risk averse? - ANS✔✔ Avoid risk if and when possible. (Will pay extra to remove risk
from a set of outcomes.)
What is a risk neutral? - ANS✔✔ Will evaluate risk and will strive to "pay" no more or less than
the expected loss to avoid the risk.
What is a risk taker? - ANS✔✔ Will "gamble" on a big payout and not take many precautions to
avoid risk.
What is an objective risk? - ANS✔✔ Defined as the relative variation of actual loss from
expected loss can be statistically calculated by some measure of dispersion. (Standard
deviation)
,What is the law of large numbers? - ANS✔✔ States that as the number of exposure units
increases, the more closely the actual loss experience will approach the expected loss
experience.
What is a subjective risk? - ANS✔✔ Defined as the uncertainty based on a person's mental
condition or state of mind, varies by individual. (Cannot be measured)
What is the chance of loss? - ANS✔✔ Defined as the probability that an event will occur.
What is a peril? - ANS✔✔ Defined as the cause of the loss.
Ex. Your house burns because of fire, the peril, or cause of loss, is the fire.
What is a hazard? - ANS✔✔ Cause of peril, a condition that creates or increase the frequency of
severity of loss.
Ex. Your house burns because of a fire because of wood, wood is the hazard.
What are the four major types of hazards? - ANS✔✔ 1. Physical hazard
2. Moral hazard
3. Attitudinal hazard (Morale hazard)
4. Legal hazard
What is a physical hazard? - ANS✔✔ A physical condition that increases the frequency or
severity of loss.
Ex. Icy road that increases the chance of an auto insurance.
What is a moral hazard? - ANS✔✔ Dishonesty or character defects in an individual that increase
the frequency or severity of loss.
Ex-post vs. Ex-ante
, Ex. Faking an accident to collect from insurers, intentional murder to collect life insurance.
What is ex-post and ex-ante? - ANS✔✔ Ex-post is when you exaggerate after a loss and ex-ante
is when you lie that you don't have problems for health insurance.
What is an attitudinal hazard (morale hazard)? - ANS✔✔ Carelessness or indifference to a loss
which increases the frequency or severity of a loss.
Ex. Leaving car keys in an unlocked car.
What is a legal hazard? - ANS✔✔ Refers to characteristics of the legal system or regulatory
environment that increase the frequency or severity of losses.
What are the different kinds of risks? - ANS✔✔ 1. Pure and speculative risk
2. Diversifiable risk and nondiversifiable risk
3. Enterprise risk
What is a pure risk? - ANS✔✔ Only the possibilities of loss or no loss.
Ex. Premature death, Job-related accidents, Fire, lightening, flood
What is a speculative risk? - ANS✔✔ Possibilities of both loss or profit.
Ex. Stock purchase, Gambling, Horse racing, Investing in real estate
What is a diversifiable risk? - ANS✔✔ A risk that affects only individuals or small groups and not
entire economy. (Low correlation)
What is a nondiversifiable risk? - ANS✔✔ A risk that affects the entire economy or large
numbers or persons or groups within the economy.
It's a risk that cannot be eliminated or reduced through diversification.
Practice Questions
What is the definition of risk? - ANS✔✔ No single definition of risk.
Uncertainty concerning the occurrence of a loss.
Any situation where there is uncertainty about what outcome will occur.
Variation of outcomes.
What is loss exposure? - ANS✔✔ Any situation or circumstance in which a loss is possible,
regardless of whether a loss occurs.
What are the three different types of risk attitude? - ANS✔✔ 1. Risk Averse
2. Risk Neutral
3. Risk Taker (Lover)
What is a risk averse? - ANS✔✔ Avoid risk if and when possible. (Will pay extra to remove risk
from a set of outcomes.)
What is a risk neutral? - ANS✔✔ Will evaluate risk and will strive to "pay" no more or less than
the expected loss to avoid the risk.
What is a risk taker? - ANS✔✔ Will "gamble" on a big payout and not take many precautions to
avoid risk.
What is an objective risk? - ANS✔✔ Defined as the relative variation of actual loss from
expected loss can be statistically calculated by some measure of dispersion. (Standard
deviation)
,What is the law of large numbers? - ANS✔✔ States that as the number of exposure units
increases, the more closely the actual loss experience will approach the expected loss
experience.
What is a subjective risk? - ANS✔✔ Defined as the uncertainty based on a person's mental
condition or state of mind, varies by individual. (Cannot be measured)
What is the chance of loss? - ANS✔✔ Defined as the probability that an event will occur.
What is a peril? - ANS✔✔ Defined as the cause of the loss.
Ex. Your house burns because of fire, the peril, or cause of loss, is the fire.
What is a hazard? - ANS✔✔ Cause of peril, a condition that creates or increase the frequency of
severity of loss.
Ex. Your house burns because of a fire because of wood, wood is the hazard.
What are the four major types of hazards? - ANS✔✔ 1. Physical hazard
2. Moral hazard
3. Attitudinal hazard (Morale hazard)
4. Legal hazard
What is a physical hazard? - ANS✔✔ A physical condition that increases the frequency or
severity of loss.
Ex. Icy road that increases the chance of an auto insurance.
What is a moral hazard? - ANS✔✔ Dishonesty or character defects in an individual that increase
the frequency or severity of loss.
Ex-post vs. Ex-ante
, Ex. Faking an accident to collect from insurers, intentional murder to collect life insurance.
What is ex-post and ex-ante? - ANS✔✔ Ex-post is when you exaggerate after a loss and ex-ante
is when you lie that you don't have problems for health insurance.
What is an attitudinal hazard (morale hazard)? - ANS✔✔ Carelessness or indifference to a loss
which increases the frequency or severity of a loss.
Ex. Leaving car keys in an unlocked car.
What is a legal hazard? - ANS✔✔ Refers to characteristics of the legal system or regulatory
environment that increase the frequency or severity of losses.
What are the different kinds of risks? - ANS✔✔ 1. Pure and speculative risk
2. Diversifiable risk and nondiversifiable risk
3. Enterprise risk
What is a pure risk? - ANS✔✔ Only the possibilities of loss or no loss.
Ex. Premature death, Job-related accidents, Fire, lightening, flood
What is a speculative risk? - ANS✔✔ Possibilities of both loss or profit.
Ex. Stock purchase, Gambling, Horse racing, Investing in real estate
What is a diversifiable risk? - ANS✔✔ A risk that affects only individuals or small groups and not
entire economy. (Low correlation)
What is a nondiversifiable risk? - ANS✔✔ A risk that affects the entire economy or large
numbers or persons or groups within the economy.
It's a risk that cannot be eliminated or reduced through diversification.
