IRM Risk Management Midterm 1
Exam Questions and Answers19
A grid charting the potential frequency and severity of losses is called a - ANSWERS-Risk Map
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? - ANSWERS-It would decrease to 1%
Consider the following probability distribution: With a probability of 50% there is a 360 Dollar
loss, with a probability of 20% there is a 600 Dollar loss, with a probability of 30% there is no
loss. The variance of this probability distribution is - ANSWERS-46,800
The asset substitution hypothesis states that - ANSWERS-The firm exchanges low risk assets for
high risk investments which transfers value from bondholders to shareholders
A stakeholder of a company is an individual/business who - ANSWERS-Engages in economic
transactions with the company
From the insurer's viewpoint, all following are characteristics of an ideally insurable risk EXCEPT
- ANSWERS-The potential loss should be large
Which of the following is a speculative risk? - ANSWERS-The purchase of a common stock at
New York Stock Exchange.
A pooling arrangement is less effective at reducing participants' risk exposure if the participant
losses ar - ANSWERS-Positively correlated
,What type of risk is best managed through the purchase of insurance or risk transfer? -
ANSWERS-Low frequency, high severity
Purchasing health insurance illustrates the use of which personal risk management technique? -
ANSWERS-Risk transfer
The use of fire-resistive materials when constructing a building is an example of - ANSWERS-Risk
control
The function of an actuary is to - ANSWERS-Determine premium rates
Types of Risk - ANSWERS-Pure Risk: Loss or no loss
Speculative Risk: Profit and loss are possible
Diversifiable Risk: Affects only individuals or small groups (Car Theft)
Nondiversifiable Risk: Affects the entire economy or large numbers (Hurricane). Measured by
Beta
Types of Random Variables - ANSWERS-Discrete: Specific set of possible values (Score of 2 dice
being thrown)
Continuous: Continuing range of possible values (Temperature tomorrow)
Expected Value - ANSWERS-Sum of all (Value * Probability)
Variance - ANSWERS-Sum of all (Probability * (Expected Value - Value)^2
Covariance - ANSWERS-Sum of all (Probability * [(Expected Value {x} - Value {x}) * (Expected
Value {y} - Value {y})])
, If Z = X + Y - ANSWERS-Var (Z) = Var (X) + Var(Y) + 2 Cov (X,Y)
Correlation Coefficient - ANSWERS-Covariance (X,Y) / (Sqrt (Variance X * Variance Y))
1 is perfect positive
0 is no correlation
-1 is perfect negative
Standard Deviation - ANSWERS-Square root of Variance
Skewness - ANSWERS-No skewness means you have a symmetric distribution
Value at Risk (VaR) - ANSWERS-Worst probable loss likely to occur at some level of confidence
$500 portfolio
Prob(value of portfolio tomorrow < 400) = 0.01
VaR is 100 as there is 1% chance portfolio loses 100
Prob (loss in portfolio value >= 20 million) = .05
5% chance portfolio loses over 20 million
Central Limit Theorem - ANSWERS-Using the normal distribution can be appropriate if we are
analyzing a sum of independent identically distributed random variables.
This is regardless of population distribution
Exam Questions and Answers19
A grid charting the potential frequency and severity of losses is called a - ANSWERS-Risk Map
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? - ANSWERS-It would decrease to 1%
Consider the following probability distribution: With a probability of 50% there is a 360 Dollar
loss, with a probability of 20% there is a 600 Dollar loss, with a probability of 30% there is no
loss. The variance of this probability distribution is - ANSWERS-46,800
The asset substitution hypothesis states that - ANSWERS-The firm exchanges low risk assets for
high risk investments which transfers value from bondholders to shareholders
A stakeholder of a company is an individual/business who - ANSWERS-Engages in economic
transactions with the company
From the insurer's viewpoint, all following are characteristics of an ideally insurable risk EXCEPT
- ANSWERS-The potential loss should be large
Which of the following is a speculative risk? - ANSWERS-The purchase of a common stock at
New York Stock Exchange.
A pooling arrangement is less effective at reducing participants' risk exposure if the participant
losses ar - ANSWERS-Positively correlated
,What type of risk is best managed through the purchase of insurance or risk transfer? -
ANSWERS-Low frequency, high severity
Purchasing health insurance illustrates the use of which personal risk management technique? -
ANSWERS-Risk transfer
The use of fire-resistive materials when constructing a building is an example of - ANSWERS-Risk
control
The function of an actuary is to - ANSWERS-Determine premium rates
Types of Risk - ANSWERS-Pure Risk: Loss or no loss
Speculative Risk: Profit and loss are possible
Diversifiable Risk: Affects only individuals or small groups (Car Theft)
Nondiversifiable Risk: Affects the entire economy or large numbers (Hurricane). Measured by
Beta
Types of Random Variables - ANSWERS-Discrete: Specific set of possible values (Score of 2 dice
being thrown)
Continuous: Continuing range of possible values (Temperature tomorrow)
Expected Value - ANSWERS-Sum of all (Value * Probability)
Variance - ANSWERS-Sum of all (Probability * (Expected Value - Value)^2
Covariance - ANSWERS-Sum of all (Probability * [(Expected Value {x} - Value {x}) * (Expected
Value {y} - Value {y})])
, If Z = X + Y - ANSWERS-Var (Z) = Var (X) + Var(Y) + 2 Cov (X,Y)
Correlation Coefficient - ANSWERS-Covariance (X,Y) / (Sqrt (Variance X * Variance Y))
1 is perfect positive
0 is no correlation
-1 is perfect negative
Standard Deviation - ANSWERS-Square root of Variance
Skewness - ANSWERS-No skewness means you have a symmetric distribution
Value at Risk (VaR) - ANSWERS-Worst probable loss likely to occur at some level of confidence
$500 portfolio
Prob(value of portfolio tomorrow < 400) = 0.01
VaR is 100 as there is 1% chance portfolio loses 100
Prob (loss in portfolio value >= 20 million) = .05
5% chance portfolio loses over 20 million
Central Limit Theorem - ANSWERS-Using the normal distribution can be appropriate if we are
analyzing a sum of independent identically distributed random variables.
This is regardless of population distribution
