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Exam 1: Risk and Its Treatment

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Question 21

Multiple Choice

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All of the following are characteristics of the liability risk that most people face EXCEPT

A) a lien may be placed on your income and assets to satisfy a legal judgment.
B) substantial legal expenses may be incurred defending the claim.
C) there is no upper limit on the amount of the loss.
D) owning liability insurance eliminates the possibility of being held legally liable.

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Question 22

Multiple Choice

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MLX Drug Company would like to market a new hypertension drug.While the Food and Drug Administration (FDA) was testing the drug,it discovered that the drug produced a harmful side effect.When MLX learned of the FDA's test result,MLX abandoned its plan to produce and distribute the drug.MLX's reaction illustrates

A) risk avoidance.
B) hedging.
C) risk transfer.
D) risk retention.

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Question 23

Multiple Choice

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Which of the following statements about financial risk is (are) true? I.Enterprise risk does not include financial risk. II.Financial risk is easily addressed through the purchase of insurance.

Which of the following statements about chance of loss and risk is (are) true? I.If the chance of loss is identical for two groups,the objective risk must be the same. II.Two individuals may perceive differently the risk inherent in a given activity.

The long-run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called

Which of the following statements about liability risks is (are) true? I.Future income and assets can be attached to pay judgments if inadequate insurance is carried. II.There is an upper limit on the amount of loss.

Williams Company installed smoke detectors,a sprinkler system,and fire extinguishers in its new manufacturing facility.These devices are all examples of

An individual's personal estimate of the chance of loss is

A special form of planned retention by which part or all of a give loss exposure is retained by the firm is called

Brad started a pest control business.To protect his personal assets against liability arising out of the business,Brad incorporated the business.Brad's use of the corporate form of organization to shield against personal liability claims illustrates

The premature death of an individual is an example of

Five years ago,Shannon decided to start investing.She likes ABC Telecom Company,and she invests in the company each month.As ABC Telecom is the only company in which she invests,Shannon's financial well-being will be harmed if the price of ABC Telecom stock drops significantly.The risk of investment loss can be reduced if Shannon invests in other companies and other types of financial assets.For Shannon,the risk she faces with regard to her investments is a(n)

ABC Health Insurance Company sells health insurance in one state.Recently,that state's legislature passed a law forbidding health insurers from considering an individual's health history when selecting applicants to insure.This change in law will increase the possibility of unprofitable results for ABC.This type of hazard is an example of

A name that encompasses all of the major risks faced by a business firm is

Uncertainty based on a person's mental condition or state of mind is known as

Cathy's car hit a patch of ice on the road.The car skidded off the road and hit a tree.The presence of ice on the road is best described as a(n)

Jim and Paula Franklin started a dry cleaning business.The business may be successful or it may fail.The type of risk that is present when either a profit or loss could occur is called

Which of the following is an example of consequential (indirect) loss?

Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss.This hazard is called

Faking an accident to collect insurance proceeds is an example of