Test Bank Questions, Chapter 11
1. Why is it so difficult to identify a group of assets or other techniques that can fully
eliminate portfolio risk?
a. They types of assets that can eliminate portfolio risk are only available to
professional money managers
b. The lack of a full hedge for the lifetime work-related income streams we call
human assets
c. The volatility of portfolio returns over time
d. All of the above
e. None of the above
2. When a household revises its portfolio, it attempts to establish a risk/return strategy
that:
a. Minimizes portfolio risk as much as possible while maintaining the current
standard of living
b. Will not lead to an audit by the tax authorities
c. Optimizes portfolio income and brings about the highest standard of living
possible
d. All of the above
e. None of the above
3. In practice, we can view risk as:
a. The probability of a loss or an outcome that is below expectations.
b. The inability to hedge a loss or an outcome that is below expectations.
c. The probability that more outcomes are below expectations than above
expectations.
d. All of the above.
e. None of the above.
4. Which of the following defines risk management in practical terms?
a. The process by which we identify risks and control them so that we are able to
achieve individual goals
b. The process by which we identify risks and eliminate them so that we are able
to achieve individual goals
c. The process by which we identify risks and eliminate them so that we are able
to achieve societal goals
d. All of the above
e. None of the above
5. What is the third step of the risk management process?
a. Match appropriate risk management tools to exposure.
b. Establish exposure.
c. Implement.
d. Identify available risk management tools.
e. None of the above.
6. Which of the following is not a common risk management approach?
a. Avoid risk.
b. Reduce risk.
c. Retain risk.
d. Share risk.
e. All of the above are common risk management approached.
7. Which of the following best describes self-insurance?
a. Actively setting aside money to fund any losses should that occur
b. Using precautionary savings to purchase insurance
c. Diversifying activities to minimize risk
d. All of the above are descriptions of self-insurance
e. None of the above
8. Which of the following is not a factor in determining the appropriate overall risk
management tool to choose?
a. The cost of alternative risk management techniques
b. The amount and likelihood of loss
c. Convenience factors
d. The risk tolerance of the risk management tool.
e. All of the above are factors
9. Which of the following is not a risk faced by human-related assets?
a. Longevity – premature death
b. Longevity – extended life
c. Health and disability
d. Macro and microeconomic risks
e. All of the above are risks faced by human-related assets
10. What is longevity risk?
a. The possibility of living beyond normal expectations
b. The possibility of dying prematurely
c. The risk of outliving one’s insurance policy
d. Both a and b
e. Both a and c
11. For what does medigap insurance pay?
a. The portion of medical expenses covered by the government
b. The portion of medical expenses not covered by the government
c. Assistance at home
d. Payments to a nursing home
e. None of the above
12. Tangible assets that the household owns are:
a. Real assets
b. Human assets
c. Financial assets
d. All of the above
e. None of the above
13. Maintenance expenses can be though of as:
a. Tangible assets
b. Intangible assets
c. Intangible liabilities
d. Tangible liabilities
e. None of the above
14. Which of the following is not a reason why insurance products are inefficient in a
financial sense?
a. Overhead Costs
b. Search Costs
c. Underwriting costs
d. Incomplete information
e. All of the above are reasons why insurance products are inefficient in a financial
sense
15. What are search costs?
a. Costs that the person desiring to be insured undertakes to find out which policy
is best
b. Costs that the insurance company incurs to attract clients
c. The costs that the insured individual incurs when attempting to collect cash
from the insurance company
d. Overhead costs
e. None of the above
16. Which of the following is not a major type of insurance policy?
a. Private personal
b. Private property
c. Limited renewal
d. Government
e. All of the above are major types of insurance policies
17. Which of the following insurance categories provides coverage that makes payments
to replace income of the insured once the person is incapacitated?
a. Life
b. Long term care
c. Health
d. Disability
e. None of the above
18. Which of the following is not one of the major types of providers of insurance to
individuals?
a. The government
b. Private insurance companies through group policies offered institutionally
c. Private insurance companies through individual policies offered by independent
agents
d. All of the above are one of the major types of providers of insurance
e. None of the above is one of the major types of providers of insurance
19. Why are group policies often offered at reduced premiums?
a. Low marketing costs
b. Mass volume efficiency
c. Lower probability of payout by the insurance company.
d. All of the above
e. Both a and b
20. Which of the following is not an advantage of an individual insurance policy?
a. Flexibility
b. Portability
c. Tax advantages
d. All of the above are advantages
e. Both a and b are not advantages
21. Criteria to consider when determining the quality of a company that offers insurance
include:
a. Financial strength
b. Operating sense
c. Size of the company
d. All of the above
e. Both a and b
22. Which of the following is not a risk associated with human-related assets?
a. Health
b. Integrity of pension assets
c. Anticipated gifts
d. All of the above are risks associated with human-related assets
e. Both b and c are not risks associated with human-related assets
23. Which of the following is a risk management tool that can be used to offset the risks
associated with anticipated gifts?
a. Precautionary savings.
b. Diversification of retirement savings.
c. Maintaining close relationship with asset owner.
d. Less cyclical equity assets.
e. None of the above.
24. Which of the following is not part of an insurance policy?
a. Mortality charge
b. Investment return
c. Liability expense
d. All of the above are parts of an insurance policy
e. None of the above are a part of an insurance policy
Answer: c
25. Which of the following is an adjustment required for a needs analysis?
a. A decline in overall living costs caused by the reduction in household members
b. Future education costs for children
c. Repayment of the mortgage to reduce overhead costs and insurance needs
resulting from a decline in overall living costs
d. All of the above
e. None of the above
26. Which of the following is an approach used to asses the amount of insurance needed?
a. Partial replacement
b. Revenue enhancement
c. Private insurance needs
d. All of the above are approaches
e. None of the above is an approach
27. Which of the following is not a major type of life insurance?
a. Term
b. Whole life
c. Universal life
d. Variable life
e. Variable term life
28. The guarantee that a policy will continue in force, regardless of the health of the
insured for a stated period of time is designated:
a. Unlimited term
b. Renewable term
c. Defined period
d. Defined cost
e. None of the above
29. The feature that allows an insured to swap a term policy in the future for a whole life
policy is designated:
a. Convertible term
b. Swap term
c. Flexible swap
d. Convertible swap
e. None of the above
30. Which of the following is not a strength associated with a whole life policy?
a. The premiums remain level over time and thus aren’t unaffordable in later years
b. Higher payments than needed to cover mortality risk are an effective “forced
savings” component for those who need it
c. The policy is designed to commonly pay a cash benefit to the beneficiary in
contrast to term’s less frequent payout as temporary insurance
d. All of the above are strengths associated with a whole life policy
e. None of the above is a strength associated with a whole life policy
Essay questions:
31. Please list and describe eight risk management approaches.
32. For each of the following insurance categories, please detail the type of coverage
provided.
1) Life.
2) Disability.
3) Long Term Care.
4) Health.
5) Property and Casualty.
6) Personal Liability.
7) Unemployment.
8) Social Security.
9) Welfare, food stamps, and medical preretirement.
10) Long-term care and nursing home assistance.
