Risk 1

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1 Risk Chapter and Its Management Multiple Choice

1. The major types of business risk include all of the following except: A price risk
B diversification risk
C pure risk
D credit risk

Answer: b Type: K

2. Credit risk is
a. : the risk that a firms borrowers will not make promised payments. b. the risk that a firm will not be able to get credit from lenders c. the risk that a firm will not have sufficient funds to make payments to their creditors d. the risk due to changes in output and input prices

3. All of the following are types of price risk except:
a. commodity price risk
b. exchange rate risk
c. stock price risk
d. interest rate risk

Ans: c

4. Which of the following is not an example of a direct loss from pure risk? a. loss of profit
b. damage to assets
c. cost of paying and defending liability claims
d. employee turnover

Answer: a Type: A 1

5. Gallagher Winery is attempting to identify its pure risks. Which of the following is an example of an indirect loss for Gallagher? a. Loss of grapevines due to hail
b. Employee health problems due to insecticide usage.
c. Loss of profit due to bad publicity about a liability claim d. Cost of replacing equipment after a fire.

Answer: c Type: A

6. Which of the following is not a method of loss financing? a. diversification
b. retention
c. insurance
d. hedging

Answer: a Type: K

7. Driving at lower speeds in order to reduce the probability of having an automobile accident is an example of: a. loss financing
b. loss control
c. internal risk reduction
d. hedging

Answer: b

8. What impact does routine inspection of aircraft for mechanical problems have on the risk of airplane crashes for United Airlines? a. reduced frequency of crashes
b. reduced magnitude of loss if the crash occurs
c. eliminate airplane crashes
d. no impact on risk of airplane crashes

Answer: a Type: A 2

9. An advantage of centralizing the function of risk management in the organization is: a. Reduced concern for risk management by managers and employees in the firms various operating units. b. Reduced diversification.

c. Economies of scale in arranging loss financing.
d. Less effective interaction between the risk manager and senior management.

Answer: c Type: K

10. Vickies Vanities, Inc. is a small boutique that sells expensive designer clothing. Which one of the following is not a pure risk to the owner? a. losses due to theft of inventory
b. loss of revenue due to recession
c. liability claims for customer injury
d. injury in the store risk of a liability claim for injury to an employee

11. Which one of the following is not an example of a personal earnings risk? a. death
b. stock dividends
c. unemplyoment
d. disability

Answer: b

12. Teds Brewery imports beer from Thailand to the U.S. To facilitate the transactions Teds Brewery holds large amounts of Thai currency (baht). The uncertainty that Ted faces regarding the U.S. dollar value of his holdings of Thai currency is an example of a. price risk

b. credit risk
c. international risk
d. pure risk

Answer: a Type: A 3

13. Longevity is a major type of personal risk. The longevity risk refers to possibility that a person will a. hold an investment too long
b. be unable to retire
c. die before reaching retirement age
d. outlive his (or her) financial resources

Answer: d Type: K

14. Which one of following is not a major method of managing risk? a. loss control
b. loss identification
c. loss financing
d. financing internal risk reduction

Answer: b Type: K

15. Prairie Flowers sells fresh flowers at a curbside outlet. The owners know the expected level of daily sales as well as the variability daily of sales. They are trying to decide how large of a supply to provide at the outlet each day. Too few flowers results in lost sales, too many flowers results in spoilage (or wilting). This is an example of a. pure risk

b....
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