RMI Exam 1 Review Spring 2016 What effect do political incentives have on the discount rate used to make governmental decisions A Increase the discount rate B Decrease the discount rate C The discount rate is unaffected D There is no way of knowing the effect on the discount rate Answer A Increase the discount rate True or False Normative Questions ask what should be A True B False Answer A True Callie is a supervisor at a firm and wants to spend 1 2 million on a new building The owners are furious they don t believe they need a new building Which term best describes the situation A Principal Agent problem B Abusive Management C Superiority Complex D Adverse Selection E Moral Hazard Answer A Principal Agent problem Which of the following is the best measure of risk A Frequency B Severity C Expected value D Standard Deviation E All of the above Answer D Standard Deviation The possibility of an organization being sued because of a product injuring a customer is an example of which of the following sources of risk A Personal B Property C Liability D Financial Answer C Liability The likelihood of an earthquake is an example of which category of risk A core B speculative C dynamic D static E none of the above Answer D static True or False A regret table represents the amount of profit earned by adopting the optimal course of action A True B False Answer B False Which is an advantage of a corporation A Unlimited liability B Life dependent on owners C Ability to issue stock D Both B and C Answer C Ability to issue stock When measuring risk impact is synonymous with A frequency B likelihood C severity D Expected value E Standard deviation Answer C severity The immediate cause of a loss is A Exposure B Peril C Hazard D Adverse Selection Answer B Peril Which of the following categories of risk represent the risks that are NOT inherent in an organization s operations A secondary B static C fundamental D core Answer A secondary Possible illness and premature death are examples of which of the following sources of risk A Personal B Property C Liability D Financial Answer A Personal Cole fails to be careful with his cell phone because he purchased the insurance coverage on it Cole s behavior is an example of A Physical hazard B Moral hazard C Adverse Selection D Genetic Predisposition Answer B Moral hazard Changes to the law such as the legalization of drinking and driving are examples of A Physical hazard B Moral hazard C Societal hazard D Liability hazard Answer C Societal hazard Which of the following is NOT a step in the risk management process A Determine objectives B Identify risks C Evaluate risks D Implement the decision E All of the above are steps in the risk management process Answer E All of the above are steps in the risk management process Common pitfalls in decision making include I Ignoring Implicit Costs II Failing to Ignore Sunk Costs III Miscalculating the reservation price A I only B II only C III only D I and II E I II and III Answer D I and II John Stuart Mill was a child prodigy and prot g of A James Mill B Bentham C Ed Diener D None of the above Answer B Bentham Which of the following is a rule of risk management A Don t risk more than you can afford to lose B Consider marginal benefits C Maximize reward whenever possible D Minimize risk whenever possible E All of the above are rules of risk management Answer A Don t risk more than you can afford to lose Which of the following represents the worst case scenario A Maximum possible loss B Mean C Standard Deviation D Probable maximum loss E Law of Large Losses Answer A Maximum possible loss Investments in Information is a method of A Risk loss control B Risk loss financing C Internal risk reduction D Diversification E None of the above Answer C Internal risk reduction In layman s terms what does it mean when we say the utility is increasing at a decreasing rate A When I have more wealth each additional dollar means less to me B When I have less wealth each additional dollar means less to me C I am indifferent between less wealth and more wealth D None of the above Answer A When I have more wealth each additional dollar means less to me True or False According to the reading Innovation Risk How to Make Smarter Decisions innovation changes the trade off between risk and reward A True B False Answer A True According to Balancing Liberty and the Pursuit of Well Being which of the following are true statements I The free market fails to protect consumer interests II The government could focus more on externalities than consumers if everyone exhibited rational behavior A I only B II only C I and II D Neither I or II Answer C I and II What is the definition of risk A Loss B Uncertainty regarding loss C Possibility of loss or gain D All of the above E None of the above Answer B Uncertainty regarding loss Anti lock brakes are an example of A Risk loss control B Risk loss financing C Internal risk reduction D Retention E Hedging Answer A Risk loss control Risk loss Reduction is aimed at A frequency B severity C Both frequency and severity D Retention E Hedging Answer B severity Reducing the level of risky activity is a method of A Risk loss control B Risk loss financing C Internal risk reduction D Retention E Hedging Answer A Risk loss control Insurance is an example of A Funded retention B Unfunded retention C Transfer D Unplanned retention E All of the above Answer C Transfer The reading A Scientific View of Risk added what component to the definition of risk A Adverse effects B A time element C A possibility of death D Risk reduction E Value of a human life Answer B A time element One of the core themes of the reading A Scientific View of Risk is that risk reduction has the following costs I Monetary II Non monetary III Societal utility A I only B II only C III only D I and II E I and III Answer D I and II True or False According to the reading Innovation Risk How to Make Smarter Decisions the only proper thing to do with an incomplete model is to stop using it Answer False A vehicle is an example of which of the following A Durable good B Service C Nondurable good D None of the above Answer A Durable good The preferred approach to risk identification is A Combination approach B Questionnaires C Checklists D Procedure guides E Contract analysis Answer A Combination approach True or False According to the reading Innovation Risk How to Make Smarter Decisions a major source of risk is the imbalance that can occur between
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