CPCU 500 Exam Study Guide latest updated (Graded A)

In the context of risk, the chance of being injured while driving to and from work, loading a truck at work, moving furniture at home, or falling in an icy parking lot at the mall are all examples of A. Possibilities. B. Uncertainties. C. Probabilities. D. Losses. - Answer- A. Possibilities. The statement, "There is a five percent chance that John will be injured in an automobile accident while driving to work tomorrow," is an example of A. Quantifying risk. B. Verifying risk. C. Quantifying loss exposures. D. Identifying hazards. - Answer- A. Quantifying risk. Which one of the following is measurable and quantifies risk? A. Probability B. Possibility C. Uncertainty D. Feasibility - Answer- A. Probability One of the elements of risk is uncertainty. Which one of the following best describes the uncertainty that risk involves? A. Uncertainty as to how to manage potential losses B. Uncertainty as to whether a negative outcome is possible C. Uncertainty as to the type and timing of an outcome D. Uncertainty as to whether insurance is available - Answer- C. Uncertainty as to the type and timing of an outcome Hardware Store has been able to control its prices and inventory since it has no competitors. A new highway currently being constructed is going to allow increased competition for Hardware Store. According to the quadrants of risk, this risk of increased competition falls into the category of A. Strategic risk. B. Hazard risk. C. Operational risk. D. Financial risk. - Answer- A. Strategic risk. Company G is a manufacturer of high profile golf equipment. The risk management professional for Company G is concerned about loss of business related to product design. Failing to respond to changing customer demand and preferences in the design of golf clubs could cost Company G significant market share. Categorized according to the quadrants of risk, this exposure to loss would be classified as a(n) A. Strategic risk. B. Financial risk. C. Operational risk. D. Hazard risk. - Answer- A. Strategic risk. George has received an inheritance and is deciding what to do with the money. He has limited his options to four choices: donate all the money to his favorite charity, use the entire inheritance to buy a yacht, invest the inheritance in a small rental property, or use the entire amount to purchase T-bills. Which one of the following statements is true regarding the risk involved in George's options? A. Donating his inheritance to charity is a pure risk; there is no uncertainty that the money will be gone and George will have no chance of profit. B. Buying a boat is a nondiversifiable risk because George can only afford to purchase a single yacht. C. The rental property presents both pure and speculative risk; property values may increase, and the building could burn down. D. Purchasing T-bills is a pure risk because the interest rate payable is known, and the chance of loss is minimal. - Answer- C. The rental property presents both pure and speculative risk; property values may increase, and the building could burn down. Risk can be classified as pure or speculative. Which one of the following is the best example of a speculative risk? A. Acquiring a new television B. Investing in shares of stock C. Buying a new personal vehicle D. Purchasing an insurance policy - Answer- B. Investing in shares of stock Which one of the following statements is true regarding enterprise risk management (ERM)? A. ERM is concerned with an organization's pure risk, primarily hazard risk. B. The ERM framework encompasses all stakeholders in the organization. C. In ERM, the risk management function is the responsibility of the safety manager. D. ERM requires less communication than traditional risk management. - Answer- B. The ERM framework encompasses all stakeholders in the organization. A risk management plan that considers all of the risks that an organization faces, including operational, financial, and strategic risks, is called A. An enterprise risk management plan. B. An open-perils risk management plan. C. A protected cell risk management plan. D. A hazard risk management plan. - Answer- A. An enterprise risk management plan. The single largest impediment to successful implementation of an enterprise risk management (ERM) program is Select one: A. Traditional organizational culture with entrenched risk silos. B. Lack of required skills to effectively implement an ERM program. C. Lack of vision by the management team that leads to under-performance of the ERM plan and early termination. D. Opposition from stakeholders—employees, stockholders, customers, and suppliers. - Answer- A. Traditional organizational culture with entrenched risk silos. The consensus process by which the veracity of data is confirmed and verified is known as Select one: A. Telematics. B. Machine learning. C. The Internet of Things. D. Mining. - Answer- D. Mining. Which one of the following is a virtual ledger of data that has been verified, timestamped, encrypted, and protected against tampering? Select one: A. Artificial intelligence B. The Internet of Things C. Closed-loop system D. Blockchain - Answer- D. Blockchain Which one of the following is the network through which sensors and other smart products capture and transmit data? Select one: A. Blockchain B. Cloud C. Artificial intelligence D. Internet of Things - Answer- D. Internet of Things Insurers and risk managers can use the large volumes of data collected and organized through telematics to help improve results for which one of the following types of insurance? Select one: A. Health B. Workers compensation C. Automobile D. Property - Answer- C. Automobile Organizations find it difficult to establish a benchmark against which the performance of their risk management program can be assessed because it is difficult to assign a specific value to the Select one: A. Cost of implementing and administering risk management. B. Cost of measures to prevent or reduce the size of potential losses. C. Cost of residual uncertainty. D. Cost of losses not reimbursed by insurance. - Answer- C. Cost of residual uncertainty. The two benefits of risk management affecting individuals, organizations, and society are: it preserves financial resources by reducing expected losses and it Select one: A. Reduces the residual uncertainty associated with risk. B. Increases productivity within the economy and improves overall standard of living. C. Increases the attractiveness to investors. D. Improves the allocation of productive resources. - Answer- A. Reduces the residual uncertainty associated with risk. Which one of the following statements is true regarding risk management efforts on the part of individuals, organizations, and society in general? Select one: A. Organizations tend to exhibit a greater degree of risk aversion than do individuals. B. The benefits that risk management efforts provide to individuals and organizations are not felt by society in general. C. Risk management makes those who own or run an organization more willing to undertake risky activities. D. Risk management tends to increase the deterrence effect of risk in organizations. - Answer- C. Risk management makes those who own or run an organization more willing to undertake risky activities. Risk management programs should Select one: A. Operate economically and efficiently. B. Incur substantial costs for slight benefits. C. Be an autonomous part of the organization. D. Not use benchmarking to compare costs. - Answer- A. Operate economically and efficiently. Which of the following risk management program goals is an essential goal for all public entities? Select one: A. Growth B. Continuity of operations C. Earning stability D. Survival - Answer- B. Continuity of operations Aligning risks with the organization's risk appetite defines Select one: A. Compliance. B. Tolerable uncertainty. C. Social responsibility. D. Value at risk. - Answer- B. Tolerable uncertainty. The second step in the risk management process is analyzing loss exposures. Which one of the following is true regarding this step? Select one: A. Loss exposures are analyzed based on loss frequency, loss severity, total dollar losses, and timing in this step. B. Loss exposures that could interfere with the achievement of the organization's goals are identified in this step. C. A weakness of loss exposure analysis is that it is useful only for those types of losses that an organization has suffered in the past. D. A major strength of loss exposure analysis is that the process is generally inexpensive. - Answer- A. Loss exposures are analyzed based on loss frequency, loss severity, total dollar losses, and timing in this step. Which one of the following is the first step in the risk management process? Select one: A. Examine the feasibility of risk management techniques B. Monitor results and revise the risk management program C. Identify loss exposures D. Analyze loss exposures - Answer- C. Identify loss exposures A risk management program must be monitored and periodically revised, and that revision involves four steps. Which one of the following is one of those four steps? Select one: A. Establish results-based rather than activity-based standards of acceptable performance. B. Compare actual results with the established performance standards. C. Reduce any performance standards that have not been achieved by the actual results. D. Return to the first step in the risk management process to identify new loss exposures. - Answer- B. Compare actual results with the established performance standards. After identifying and analyzing loss exposures and evaluating and selecting the appropriate risk management techniques, the next step in the risk management process is to Select one: A. Monitor the results. B. Revise the risk management program. C. Implement the selected techniques. D. Decide on risk financing techniques. - Answer- C. Implement the selected techniques. Risk is a term that is regularly used and that is generally understood in context. As used in this discussion, which one of the following is one of the two elements within the definition of risk? Select one: A. Uncertainty of outcome B. Likelihood of injury or damage to property C. Probability of financial loss D. Opportunity for profit - Answer- A. Uncertainty of outcome Probabilities are stated as a decimal figure, a percentage, or a Select one: A. Stated constant. B. Fraction. C. Dollar amount. D. Credibility factor. - Answer- B. Fraction. To understand risk, one needs to know the probability of an outcome or event occurring. Which one of the following statements is correct with respect to probability? Select one: A. It is typically expressed verbally rather than numerically. B. It can be used to decide which activities to undertake. C. It verifies that risk is present, but does not quantify it. D. It identifies what can be lost when a negative outcome occurs. - Answer- B. It can be used to decide which activities to undertake. Risk involves the possibility of a negative outcome. Possibility means Select one: A. The likelihood of an event occurring. B. That an outcome is unavoidable. C. An identified and predictable outcome. D. That an outcome may or may not occur. - Answer- D. That an outcome may or may not occur. Billy owns a beach front cottage which has become his primary residence. Billy's primary concern is that his home will be hit by a hurricane and badly damaged or even destroyed. For Billy, this hurricane risk is a Select one: A. Strategic risk. B. Subjective risk. C. Market risk. D. Speculative risk. - Answer- B. Subjective risk. The focus of risk quadrants is different from the focus of risk classifications. While the classifications of risk focus on some aspect of the risk itself, the four quadrants of risk focus on Select one: A. Subjective and objective risks. B. The source of risk and who has traditionally managed it. C. Pure and speculative risks. D. The determination of whether the risk is diversifiable. - Answer- B. The source of risk and who has traditionally managed it. One approach to categorizing risks involves dividing risks into risk quadrants. The risks categorized as hazard risks are Select one: A. Traditionally handled by the chief financial officer. B. Speculative risks that fall outside the operational risk category. C. Fundamental to an organization's existence and business plans. D. Traditionally managed by risk management professionals. - Answer- D. Traditionally managed by risk management professionals. Risk can be classified as diversifiable or nondiversifiable. Which one of the following statements is true with respect to this type of risk classification? Select one: A. Private insurance tends to concentrate on nondiversifiable risks; government insurance is often suitable for diversifiable risks. B. The distinction between diversifiable and nondiversifiable risks is clear; risks cannot fall under both classifications simultaneously. C. Inflation, unemployment, and natural disasters, such as hurricanes, are examples of diversifiable risk. D. Diversifiable risks tend not to be correlated so they can be managed through diversification or spread of risk. - Answer- D. Diversifiable risks tend not to be correlated so they can be managed through diversification or spread of risk. 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