BUSFIN 3300 EXAM #1 REVIEW WITH
ACCURATE SOLUTIONS
Risk - ANSWER-Uncertainty concerning the occurrence of a loss
Loss Exposure - ANSWER-Any situation or circumstance in which a loss is possible,
regardless of whether loss occurs
Objective Risk - ANSWER-Relative variation of actual loss from expected loss
Subjective (Perceived) Risk - ANSWER-Uncertainty based on a person's mental
condition or state of mind; individual opinion
Chance of Loss - ANSWER-Probability that an event that causes a loss will occur
Objective Probability - ANSWER-Long-run relative frequency of an event based on the
assumption of an infinite number of observations and of no change in the underlying
conditions
Peril - ANSWER-Cause of the loss
Hazard - ANSWER-Condition that creates or increases the frequency or severity of loss
Attitudinal Hazard (Morale Hazard) - ANSWER-Carelessness or indifference of a loss,
which increase the frequency or severity of a loss
Physical Hazard - ANSWER-Physical condition that increases the frequency or severity
of a loss
Moral Hazard - ANSWER-Dishonesty or character defects in an individual that increase
the frequency or severity of a loss
Legal Hazard - ANSWER-Characteristics of the legal system or regulatory environment
that increase the frequency or severity of a loss
Pure Risk - ANSWER-Situation in which there are only the possibilities of loss or no loss
Speculative Risk - ANSWER-Situation in which either profit or loss is possible
Diversifiable Risk - ANSWER-Risk that only affects individuals or small groups; can be
reduced or eliminated by diversification
, Nondiversifiable (Fundamental) Risk - ANSWER-Risk that affects the entire economy or
large numbers of persons group within the economy
Systematic Risk - ANSWER-Risk of collapse of an entire system or entire market due to
failure of single entities that can result in breakdown of entire financial systems
Personal Risk - ANSWER-Risk that directly affect an individual or family
Property Risk - ANSWER-Involve possibility of losses associated with the destruction or
theft of property
Direct Loss - ANSWER-Financial loss that results from the physical damage,
destruction, or theft of the property (i.e. fire damage to home)
Higher - ANSWER-(Higher/Lower) premiums to cover additional losses REDUCE
disposable income and consumption of other goods and services
Risk Management - ANSWER-Process that identifies loss exposures faced by an
organization and selects the most appropriate techniques for treating such exposures
Prepare for potential losses in the most economical way, reduce anxiety, meet any legal
obligations - ANSWER-Pre-Loss Objectives of Risk Management (3)
Survival of the firm, continue operating, stability of earnings, continues growth of the
firm, minimize the effects that a loss will have on other persons and on society -
ANSWER-Post-Loss Objectives of Risk Management (5)
Identify the potential losses, measure and analyze the loss exposures, select the
appropriate combination of techniques for treating the loss exposures, implement and
monitor the risk management program - ANSWER-Steps in the Risk Management
Process (4)
Maximum Possible Loss - ANSWER-The worst loss that can happen to the firm during
its lifetime
Probable Maximum Loss - ANSWER-The worst loss that is likely to happen
Avoidance, Loss Prevention, Loss Reduction, Duplication, Separation, Diversification -
ANSWER-Methods of Risk Control (6)
Avoidance - ANSWER-Certain loss exposure is never acquired or undertaken, or an
existing loss exposure is abandoned
Duplication - ANSWER-Having back-ups or copies of important documents or property
available in case a loss occurs
ACCURATE SOLUTIONS
Risk - ANSWER-Uncertainty concerning the occurrence of a loss
Loss Exposure - ANSWER-Any situation or circumstance in which a loss is possible,
regardless of whether loss occurs
Objective Risk - ANSWER-Relative variation of actual loss from expected loss
Subjective (Perceived) Risk - ANSWER-Uncertainty based on a person's mental
condition or state of mind; individual opinion
Chance of Loss - ANSWER-Probability that an event that causes a loss will occur
Objective Probability - ANSWER-Long-run relative frequency of an event based on the
assumption of an infinite number of observations and of no change in the underlying
conditions
Peril - ANSWER-Cause of the loss
Hazard - ANSWER-Condition that creates or increases the frequency or severity of loss
Attitudinal Hazard (Morale Hazard) - ANSWER-Carelessness or indifference of a loss,
which increase the frequency or severity of a loss
Physical Hazard - ANSWER-Physical condition that increases the frequency or severity
of a loss
Moral Hazard - ANSWER-Dishonesty or character defects in an individual that increase
the frequency or severity of a loss
Legal Hazard - ANSWER-Characteristics of the legal system or regulatory environment
that increase the frequency or severity of a loss
Pure Risk - ANSWER-Situation in which there are only the possibilities of loss or no loss
Speculative Risk - ANSWER-Situation in which either profit or loss is possible
Diversifiable Risk - ANSWER-Risk that only affects individuals or small groups; can be
reduced or eliminated by diversification
, Nondiversifiable (Fundamental) Risk - ANSWER-Risk that affects the entire economy or
large numbers of persons group within the economy
Systematic Risk - ANSWER-Risk of collapse of an entire system or entire market due to
failure of single entities that can result in breakdown of entire financial systems
Personal Risk - ANSWER-Risk that directly affect an individual or family
Property Risk - ANSWER-Involve possibility of losses associated with the destruction or
theft of property
Direct Loss - ANSWER-Financial loss that results from the physical damage,
destruction, or theft of the property (i.e. fire damage to home)
Higher - ANSWER-(Higher/Lower) premiums to cover additional losses REDUCE
disposable income and consumption of other goods and services
Risk Management - ANSWER-Process that identifies loss exposures faced by an
organization and selects the most appropriate techniques for treating such exposures
Prepare for potential losses in the most economical way, reduce anxiety, meet any legal
obligations - ANSWER-Pre-Loss Objectives of Risk Management (3)
Survival of the firm, continue operating, stability of earnings, continues growth of the
firm, minimize the effects that a loss will have on other persons and on society -
ANSWER-Post-Loss Objectives of Risk Management (5)
Identify the potential losses, measure and analyze the loss exposures, select the
appropriate combination of techniques for treating the loss exposures, implement and
monitor the risk management program - ANSWER-Steps in the Risk Management
Process (4)
Maximum Possible Loss - ANSWER-The worst loss that can happen to the firm during
its lifetime
Probable Maximum Loss - ANSWER-The worst loss that is likely to happen
Avoidance, Loss Prevention, Loss Reduction, Duplication, Separation, Diversification -
ANSWER-Methods of Risk Control (6)
Avoidance - ANSWER-Certain loss exposure is never acquired or undertaken, or an
existing loss exposure is abandoned
Duplication - ANSWER-Having back-ups or copies of important documents or property
available in case a loss occurs
