RMI 2302 MODULE 1 (NYCE)EXAMS QUESTIONS AND ANSWERS
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RMI 2302 MODULE 1
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RMI 2302 MODULE 1
RMI 2302 MODULE 1 (NYCE)
What is Risk? - Answer- Many Definitions:
-Individual
-Organization
-Society
"Uncertainty Regarding Loss"
Using the Term Risk - Answer- Which is riskier?
-Jumping off of a 1-story building
-Jumping off of a 25-story building
What is a "high risk drive...
RMI 2302 MODULE 1 (NYCE)
What is Risk? - Answer- Many Definitions:
-Individual
-Organization
-Society
"Uncertainty Regarding Loss"
Using the Term Risk - Answer- Which is riskier?
-Jumping off of a 1-story building
-Jumping off of a 25-story building
What is a "high risk driver"
Danger/=Risk
Risk Measurement - Degree of Risk - Answer- -Relative variation of actual from expected loss
(variation or standard deviation)
-How far is it from what we expected to happen to what actually happened?
Start Thinking about Risk - Answer- -Uncertainty is doubt about our ability to predict future outcomes
-Uncertainty can differ across individuals even when risk is the same (subjective)
-Information does not alter risk (objective), but can alter uncertainty
-Reduction in uncertainty can be a good thing
Categories of Risk - Answer- Pure vs. Speculative
Static vs. Dynamic
Fundamental vs. Particular
Core vs. Secondary
Pure vs. Speculative - Answer- Pure risks are risks that involve only two potential outcomes, either loss
or no loss. For example, when you leave class your car is either there, or it was stolen. The car did not
suddenly increase in value while you were in class. Your two potential states of nature are loss or no loss,
there is no possibility of gain.
Speculative risks are risks where you may have a loss or no loss, but also have a gain. For example,
buying a share of Google, it can go up in value, go down in value or remain the same.
Static vs. Dynamic Risk - Answer- Static risks are risks that are unchanging through time. For example,
the chance of an earthquake or the chance of the earth getting hit by a meteor are generally static risks.
They don't change from day to day or even year to year.
Dynamic risks are risks that are changing through time. For example, the risk of identity theft, or credit
card numbers being stolen during online transactions are much different today than just a few years ago.
Fundamental vs. Particular Risk - Answer- Fundamental risks are risks that affect a large portion of the
population at a given time. For example, a hurricane, or health pandemic.
, Particular risks are risks that only affect a single person, or small group of people at a given time. For
example, an auto accident
Core vs. Secondary - Answer- Core risks are risks that are inherent to the fundamental activities of an
organization. For example, UPS and the risk of traffic accidents.
Secondary risks are risks that are not part of the core operations of an organization. For example,
speculative derivative trading by UPS.
Sources of Risk - Answer- Personal Risks: risks that are directly related to an individual's life, health or
safety
Property Risks: risks that are directly related to the potential for damage to physical property (buildings,
cars, jewelry, etc...)
Liability Risks: risks that are directly related to an individual being held liable for its actions or inactions.
For example, inflicting physical harm on another individual or damaging someone else's property
Financial Risks: risks that are directly related to the financial standing of an individual or organization. For
example, investment risks, new product launches, etc...
Exposure - Answer- person or property facing risk of loss
Peril - Answer- the immediate cause of loss
Hazard - Answer- condition affecting the frequency or severity of loss
Physical hazard - tangible conditions, e.g. a wet floor makes it more likely someone will slip and fall.
Moral/Morale hazard - attitude/behavior that affects the frequency/severity of loss, e.g. not being careful
with your cell phone because you purchased the insurance coverage on it.
Societal hazard - legal/cultural/attitude that affects the frequency/severity of loss, e.g. How easy or hard it
is to sue someone who has caused you a loss.
Attitude Toward Risk - Answer- Risk Neutral - indifferent toward risk
Value of risky situation is expected loss
Risk Averse - Prefer to avoid risk
Willing to pay more than expected loss to avoid risk
Risk Seeker - prefer risk
Would pay more than expected return to engage in risky situation
Burden of Risk on Society - Answer- -Need for Larger Emergency Funds: when faced with potential
losses, individuals and organizations often need to keep funds in reserve to pay for potential losses, this
is not the "highest and best use" of those funds. In other words, there may be some opportunity costs to
emergency funds that are not beneficial to society.
-Loss of Needed Goods and Services: when losses do occur, funds from other sources may be
reallocated to those losses (think of the amount of government funds spent on Hurricane Katrina). When
that occurs, needed goods and services may be lost due to the lack of funds.
-Fear and Worry: while not a direct financial cost, fear and worry do affect the economy in very real ways.
Much of the US economy is built upon consumer confidence. When fear and worry of potential risk begins
to weigh too heavily, economic losses occur.
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