Chapter Bonus C – Managing Risk
BonusC-21
Multiple Choice Questions
84. Which of the following is a goal of enterprise risk management?
A. Defining which risks the program will manage
B. Deciding how to petition the government for financial help
C. Assigning risk management to a lobbyist in Washington
D. Refining the business plan for risk management
85. Risk management for business is critical due in part to:
A. natural disasters.
B. profitability.
C. legal requirements.
D. international requirements.
86. A type of event that makes risk management more important is:
A. terrorist threats.
B. marketing mistakes.
C. continuous increases in the stock market.
D. larger numbers of employees in the average company.
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87. Enterprise risk management is:
A. important to business.
B. irrelevant to business.
C. only used by nonprofit organizations.
D. only used by the Department of Homeland Security.
Feedback: A survey presented in Quality Digest found that more than 90 percent of 271
executives are building or want to build enterprise risk management into their organizations.
The management of risk is a major issue for businesses throughout the country.
88. Risk management is:
A. only a consideration to insurance companies.
B. increasing in importance.
C. decreasing in importance.
D. used exclusively when engaging in global Internet business.
Feedback: Given the 9/11 attack, two wars, corporate and government scandals, and several
major hurricanes and tornadoes, it is no surprise that risk management is increasing in
importance.
89.
Chapter Bonus C – Managing Risk
BonusC-23
Airlines likely consider risk management to be more important because of:
A. changing flight patterns.
B. terrorist threats.
C. employing more experienced pilots.
D. the decrease in price of jet fuel.
Feedback: Risk to airlines has increased due to the threat of terrorist attacks. The changes in
likelihood of a terrorist attack have increased the importance of risk management to the airline
industry.
90. Jonathon is in charge of risk management for Learnit Corp., a large chain of preschools in
the mid-west. He has decided to build enterprise risk management into the organization.
The first step Jonathon should take is to:
A. decide on the spyware software the organization should buy.
B. send a letter to all of the staff informing them that using email for personal purposes
will not be allowed.
C. remove the playgrounds from all of the locations.
D. decide which risks the organization should manage.
Feedback: An enterprise risk management (ERM) program usually has a few well-defined
goals, the first of which is to define which risks the program will manage.
91.
Chapter Bonus C – Managing Risk
BonusC-24
________ is a term that refers to the chance of loss, the degree of probability of loss, and
the amount of possible loss.
A. Speculation
B. Hazard
C. Insurability
D. Risk
92. ________ risk involves a chance of either profit or loss.
A. Insurable
B. Managed
C. Speculative
D. Pure
93. ________ risk involves the threat of loss with no chance for profit.
A. Minimum
B. Pure
C. Speculative
D. Managed
94.
Chapter Bonus C – Managing Risk
Which of the following is the risk that most concerns businesspeople?
A. Avoidable risk
B. Pure risk
C. Speculative risk
D. Managed risk
95. Which type of risk management strategy is a company using when it installs mirrors and
surveillance cameras to spot and prevent shoplifting?
A. Avoiding the risk
B. Insuring against the risk
C. Assuming the risk
D. Reducing the risk
96. The threat of lawsuits has caused some drug companies not to manufacture certain types
of vaccines. What type of risk management option is being practiced?
A. Insuring against the risk
B. Assuming the risk
C. Avoiding the risk
D. Reducing the risk
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97. Some businesses will set aside money to cover routine losses and buy “catastrophe”
policies to cover big losses. This is an example of which of the following?
A. Avoiding the risk
B. Self-insuring against the risk
C. Reducing the risk
D. A loss-prevention program
98. A firm that chooses to self-insure and cover losses out of its budget is said to:
A. fly blind.
B. roll boxcars.
C. go bare.
D. internalize risk.
99. An insurance company would not be willing to insure a risk if it:
A. results from political disruptions.
B. has a measurable loss.
C. results from an accident.
D. has a low probability of occurring.
100.
Chapter Bonus C – Managing Risk
A policyholder must have a(n) __________ in what is being insured, meaning that the
policyholder must be the one at risk to suffer an economic loss.
A. speculative interest
B. uncertain stake
C. unsecured holding
D. insurable interest
101. __________ is the armor individuals, businesses, and nonprofit organizations use to
protect themselves from various financial risks.
A. A good accountant
B. Investment in AAA bonds
C. Insurance
D. Indemnity
102. Organizations spend about __________ percent of gross domestic product on
insurance premiums.
A. 2
B. 5
C. 10
D. 20
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110. Sadly, during a war many civilians watch everything they have destroyed. Insurance
companies will view this type of loss as:
A. an insurable risk.
B. an uninsurable risk.
C. a demonstration of the law of large numbers.
D. a rule of indemnity.
Feedback: An uninsurable risk is one that no insurance company will cover including political
risks such as losses from war.
111. Abraham is excited about opening his car wash facility. The required investment of
money and time is sizable and although he has high hopes, Abraham is taking a
speculative risk. This means that:
A. his investment involves a chance of profit or loss.
B. his risk can be shifted to an insurance company if he buys product liability insurance.
C. he would be best advised to self-insure his exposure to malpractice liability.
D. his insurance premium would be based on the law of large numbers.
Feedback: A speculative risk involves the chance of either profit or loss. All entrepreneurs
take speculative risk on the chance of making a profit.
112.
Chapter Bonus C – Managing Risk
Amusement parks often have a minimum height restriction on some of their most
thrilling rides. This risk management strategy is done in an effort to:
A. minimize the speculative risk associated with an injury.
B. reduce the risk associated with a potential accident.
C. self-insure against a catastrophic accident.
D. create the perception of a more exciting ride.
Feedback: Reducing risk can be accomplished by establishing loss-prevention programs such
as the technique used by amusement parks. Some amusement parks will discourage pregnant
guests or those with a history of heart or back problems from riding certain rides.
113. Harold owns several gas stations. He realizes that among the several risks associated
with this type of business is the risk of minor damage to cars from dirty or contaminated
fuel. He also knows that there is a small chance of a major loss if a fire occurred at one of
his gas stations. Harold wants to control his insurance costs while still maintaining a
reasonable risk management program. He is considering self-insurance. If he decides to
use this approach, he will probably:
A. rely entirely on a strategy of risk avoidance.
B. decide to cover both types of risk himself.
C. decide to self-insure for the smaller, more routine, losses associated with the damage
caused by dirty or contaminated fuel, but seek coverage from an insurance company for
the potentially much larger loss from a fire.
D. decide to cover the risk of fire himself, and take out an insurance policy to cover the
risk of contaminated fuel.
Feedback: Self-insurance is a strategy to lower insurance costs by setting aside money to
cover routine claims and then taking out insurance for larger, potentially catastrophic, losses.