ERM Exam 1 Study Exam Questions & Answers 2024/2025
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Course
ERM
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ERM
ERM Exam 1 Study Exam Questions & Answers 2024/2025
Certainty - ANSWERSAlready know the outcome. Ex. we know what the weather was yesterday
Uncertainty - ANSWERSDon't know the outcome yet, different outcomes are possible. Ex. don't know the outcome of the next presidential election, the sto...
ERM Exam 1 Study Exam Questions &
Answers 2024/2025
Certainty - ANSWERSAlready know the outcome. Ex. we know what the weather was yesterday
Uncertainty - ANSWERSDon't know the outcome yet, different outcomes are possible. Ex. don't know the
outcome of the next presidential election, the stock market, etc. - Know the possible outcomes, dont
know the probability
Risk - ANSWERSRisk is a form of uncertainty
- know the possible outcomes
- know the probabilities
Ambiguity - ANSWERSLike risk, ambiguity is also a form of uncertainty
- know the possible outcomes
- probabilities are only imperfectly known (data and estimation errors, know odds but not perfectly well.)
Ex. could be a whole range of distributions possible, do we know if flipping a coin is fair? do we know if
the weather app is correct? etc.)
Deep Uncertainty - ANSWERSAlso a form of uncertainty
- don't know the possible outcomes (some outcomes people think are impossible until it happens (ex.
don't do risk management for an alien invasion))
- know as a black swan- something you don't think exists until you see it
Risk can represent 2 things: - ANSWERS1. A threat
2. An opportunity
There is no risk so great that it must be eliminated at all costs!
- Risk management is a cost
,Quantify impact of risk by looking at: - ANSWERS- expected loss (first-order)
- variance around expected loss (second-order)
- higher orders, tail risk, etc.
One situation has more risk than another one if: - ANSWERS- there are greater expected loss
- there is greater variance of outcomes
Major types of business risk - ANSWERS1. Price Risk- Output risk and Input risk: commodity price risk,
exchange rate risk, interest rate risk
2. Credit Risk
3. Pure Risk- damage to assets, legal liability, worker injury, employee benefit
Major types of personal risk - ANSWERS1. Earnings- death, disability, aging, unemployment
Classifications of Risk - ANSWERS1. Pure vs speculative
2. Objective vs subjective
3. Static vs dynamic
4. Diversifiable vs non-diversifiable
(make sure you remember what all these categories mean and can give appropriate examples for each
one)
Pure Risk - ANSWERSNo chance to gain, only potential for damage (ex. tree falls on car)
Speculative Risk - ANSWERSCan have a loss or a gain (ex. stock market)
, Objective Risk - ANSWERSDoesn't depend on opinion, it depends on data (ex. on slide 6- car accidents
depending on gender)
Subjective Risk - ANSWERSEx. fears such as flying on a plane, diseases, people are really scared of even if
low risk, etc.
Static Risk - ANSWERSA risk that wont change
- ex. age
Dynamic Risk - ANSWERSA risk that can change over time (Ex. wildfire on the west coast, AI, cyber and
hacking, a hazard caused by bad weather)
diversifiable risk (unsystematic risk) - ANSWERSCan be eliminated through diversification
- can be diversified away by investors
- no effect on opportunity cost of capital
Non-diversifiable risk (market risk) - ANSWERS- cannot be diversified by investors
- raises opportunity cost of capital
ex. inflation
Why is Risk Costly - ANSWERS- Risk is costly because it reduces value (ex. tree falls on car)
Indirect Losses - ANSWERSlosses that arise as a consequence of a direct loss (ex. if car goes into shop and
you have to walk to school or take an uber)
Examples of indirect losses for Personal Risk - ANSWERS- House destroyed (hotel and restaurant costs)
- Car damaged (cost for alternative transportation)
- Laptop stolen (poor job on assignment)
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