Principles of Risk Management Exam
1 Questions and Answers
What is Risk Management - answer- Decision making process by which adverse
consequences of risk are minimized
What are "adverse consequences of risk"? - answer- Giving up possible benefits
because risk exists, and spending resources to reduce risk
Speculative risk - answer- outcomes greatly vary, both + and -
Pure risk - answer- worst outcome is staying the same
Subjective risk - answer- emotional
Objective risk - answer- quantifiable
Diversifiable risk - answer- Adding sources decreases risk
Non-diversifiable - answer- Adding sources increases risk
What is "SMART"? - answer- Specific, Measurable, Achievable, Relevant, Time-
scaled
Strategic objectives - answer- mission, goals, "big picture"*
Operational objectives - answer- day-to-day activities that will help to achieve the
strategic objectives
Enterprise Risk Management - answer- ensure ability to meet operational objectives
and therefore to achieve strategic objectives
Goal of risk management? - answer- use resources efficiently to achieve strategic
objectives
Example of an adverse consequence of risk: A) cost to rebuild following a fire. B) not
including sprinklers in a new building. C) not opening a plant in Egypt for concern
over political violence. D) all of the above. E) None of the above. - answer- C) Not
opening a plant in Egypt for concerns over political violence
What is real and personal property and what's a key difference between the two? -
answer- Real is permanent, personal is mobile. The two have different hazards.
What is book value - answer- Historical cost of an asset, accounting for depreciation
What is market value? - answer- How much an asset would sell for today
, What is firm specific value? - answer- How much an asset is worth to the
organization that owns it
What is replacement cost new? - answer- How much it would cost to buy/build an
asset brand new again
What is common law, and what is civil law? - answer- Common- rules determined by
court decisions. Civil- rules determined by legislative bodies
Stated objective of the US court system - answer- Encourage safety, compensate for
harm
Criminal wrongs vs civil wrongs - answer- Criminal- committing a crime/acts against
society. Civil- acts against individuals (including corporations)
Kinds of civil wrongs - answer- Breaches of contract, and then torts
What is negligence? - answer- The failure to exercise the care that a reasonably
prudent person would exercise in like circumstances, resulting in harm
What two things determine reasonableness? - answer- Owe a duty and breach a
duty (normal/common under the circumstances=reasonable)
Four parts of negligence - answer- Owe a duty, breach a duty, cause harm/injury,
and the breach is the approximate cause of the harm/injury
The Hand rule - answer- If cost to prevent > P(loss) * size of loss, then it is
reasonable not to prevent
Hand rule practice: .0001 chance of hack, cost $0.15 per viewer to stop, 24,000,000
viewers, and value per viewer is $200. Is it reasonable to not prevent? What if value
per viewer was $2000? - answer- Yes it is (.0001*200=.02, .02<.15)
They should prevent (.0001*2000=.20, .20>.15)
What are the four defenses against liability? Also define each - answer- Contributory
negligence- plaintiff is also somewhat at fault, causing them to lose the
case/defendant pays nothing. Comparative negligence- defendant pays for portion of
harm that is their fault. Assumption of risk- plaintiff knew what was likely to happen
but acted anyways so they should get nothing. Immunity- defendant cannot lose
to/be sued by plaintiff.
Example of 4 defenses against liability: Plaintiff is 20% at fault and experiences
$5,000 loss. Contributory/comparative? - answer- Contributory- they get $0.
Comparative- they get $4,000.
The four relaxations of burden of proof - answer- Strict liability, joint & several
liability, vicarious liability, res ipsa loquitur
1 Questions and Answers
What is Risk Management - answer- Decision making process by which adverse
consequences of risk are minimized
What are "adverse consequences of risk"? - answer- Giving up possible benefits
because risk exists, and spending resources to reduce risk
Speculative risk - answer- outcomes greatly vary, both + and -
Pure risk - answer- worst outcome is staying the same
Subjective risk - answer- emotional
Objective risk - answer- quantifiable
Diversifiable risk - answer- Adding sources decreases risk
Non-diversifiable - answer- Adding sources increases risk
What is "SMART"? - answer- Specific, Measurable, Achievable, Relevant, Time-
scaled
Strategic objectives - answer- mission, goals, "big picture"*
Operational objectives - answer- day-to-day activities that will help to achieve the
strategic objectives
Enterprise Risk Management - answer- ensure ability to meet operational objectives
and therefore to achieve strategic objectives
Goal of risk management? - answer- use resources efficiently to achieve strategic
objectives
Example of an adverse consequence of risk: A) cost to rebuild following a fire. B) not
including sprinklers in a new building. C) not opening a plant in Egypt for concern
over political violence. D) all of the above. E) None of the above. - answer- C) Not
opening a plant in Egypt for concerns over political violence
What is real and personal property and what's a key difference between the two? -
answer- Real is permanent, personal is mobile. The two have different hazards.
What is book value - answer- Historical cost of an asset, accounting for depreciation
What is market value? - answer- How much an asset would sell for today
, What is firm specific value? - answer- How much an asset is worth to the
organization that owns it
What is replacement cost new? - answer- How much it would cost to buy/build an
asset brand new again
What is common law, and what is civil law? - answer- Common- rules determined by
court decisions. Civil- rules determined by legislative bodies
Stated objective of the US court system - answer- Encourage safety, compensate for
harm
Criminal wrongs vs civil wrongs - answer- Criminal- committing a crime/acts against
society. Civil- acts against individuals (including corporations)
Kinds of civil wrongs - answer- Breaches of contract, and then torts
What is negligence? - answer- The failure to exercise the care that a reasonably
prudent person would exercise in like circumstances, resulting in harm
What two things determine reasonableness? - answer- Owe a duty and breach a
duty (normal/common under the circumstances=reasonable)
Four parts of negligence - answer- Owe a duty, breach a duty, cause harm/injury,
and the breach is the approximate cause of the harm/injury
The Hand rule - answer- If cost to prevent > P(loss) * size of loss, then it is
reasonable not to prevent
Hand rule practice: .0001 chance of hack, cost $0.15 per viewer to stop, 24,000,000
viewers, and value per viewer is $200. Is it reasonable to not prevent? What if value
per viewer was $2000? - answer- Yes it is (.0001*200=.02, .02<.15)
They should prevent (.0001*2000=.20, .20>.15)
What are the four defenses against liability? Also define each - answer- Contributory
negligence- plaintiff is also somewhat at fault, causing them to lose the
case/defendant pays nothing. Comparative negligence- defendant pays for portion of
harm that is their fault. Assumption of risk- plaintiff knew what was likely to happen
but acted anyways so they should get nothing. Immunity- defendant cannot lose
to/be sued by plaintiff.
Example of 4 defenses against liability: Plaintiff is 20% at fault and experiences
$5,000 loss. Contributory/comparative? - answer- Contributory- they get $0.
Comparative- they get $4,000.
The four relaxations of burden of proof - answer- Strict liability, joint & several
liability, vicarious liability, res ipsa loquitur
