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Finance 4201 Test 1 with correct answers
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Finance 4201 Test 1 with correct answers
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Finance 4201 Test 1 with correctanswers
selective validation - ANSWERS✔✔ the tendency to remember only positive correlations
and forget far more numerous misses.
gambler's fallacy - ANSWERS✔✔ if a coin ends up "tails" many more than 50 times in 100
trials, some people think "heads" is bound to come up more often in 100 subsequent trials to
"even up" score
When does a situation become riskier than another situation? - ANSWERS✔✔ There is
greater expected loss and the outcome has greater variability in outcomes (less predictable)
Probable Variation - ANSWERS✔✔ Actual outcome from the expected value.
Exposure to Risk - ANSWERS✔✔ created whenever circumstances give rise to an outcome
that cannot be predicted with certainty
Risk Management - ANSWERS✔✔ the process by which individuals and organizations
make decisions to reduce the adverse consequences of risk
3 steps to manage risk - ANSWERS✔✔ Identify actual and potential risks and exposures
Assess/measure the threat
Select and implement management and control measures (Avoid, Eliminate, Mitigate,
Transfer or Finance)
, 5 management and control measure options that can be implemented when dealing with
risk - ANSWERS✔✔ avoid
eliminate
mitigate
transfer
finance
What are the two criteria that typically dominate organization risk decisions? -
ANSWERS✔✔ The costs--including the loss of potential returns--of reducing the risks of
core business activities
Setting core business risk at an acceptable level, while eliminating or controlling all other
risks
Risk management should increase the expected value of the firm by increasing the present
value of future expected cash flows by: (2) - ANSWERS✔✔ Increasing the expected cash
flows
reducing the volatility of cash flows, thereby reducing the returns required by investors
When did risk management techniques start becoming alternatives to insurance? -
ANSWERS✔✔ The mid-1950s
When and which university had the first Risk management and insurance program? -
ANSWERS✔✔ Pennsylvania 1913
What are the two risk categories? Describe each - ANSWERS✔✔ Pure risk- exposure that
can result in loss or no change, traditional definition for risk management, primarily
concerned with perils, hazards and losses
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