Test Bank all Chapters

Principles of Risk Management and Insurance, 14e George Rejda, Michael McNamara

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1 Copyright © 2020 Pearson Education, Inc.Principles of Risk Management and Insurance, 14e (Rejda) Chapter 1 Risk and Its Treatment

1) Traditionally, risk has been defined as

• any situation in which the probability of loss is one.
• any situation in which the probability of loss is zero.
• uncertainty concerning the occurrence of loss.
• the probability of a loss occurring.

Answer: C

Diff: 1

Question Status: Previous Edition

AACSB: Application of Knowledge

2) Objective risk is defined as

• the probability of loss.
• the relative variation of actual loss from expected loss.
• uncertainty based on a person's mental condition or state of mind.
• the cause of loss.

Answer: B

Diff: 1

Question Status: Previous Edition

AACSB: Application of Knowledge

3) An insurance company estimates its objective risk for 10,000 exposures to be 10 percent.Assuming the probability of loss remains the same, what would happen to the objective risk if the number of exposures were to increase to 1 million?

• It would decrease to 1 percent.
• It would decrease to 5 percent.
• It would remain the same.
• It would increase to 20 percent.

Answer: A

Diff: 3

Question Status: Previous Edition

AACSB: Analytical Thinking

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

• objective risk.
• subjective risk.
• objective probability.
• subjective probability.

Answer: B

Diff: 1

Question Status: Previous Edition

AACSB: Application of Knowledge

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2 Copyright © 2020 Pearson Education, Inc.5) 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

• objective probability.
• objective risk.
• subjective probability.
• subjective risk.

Answer: A

Diff: 1

Question Status: Previous Edition

AACSB: Application of Knowledge

6) Which of the following statements about a priori probabilities is correct?

• They are subjective probabilities based on ambiguity in the way probability is perceived.
• They are subjective probabilities that may vary among individuals because of factors such as

age, gender, education, and the use of alcohol.

• They are objective probabilities that can be determined by deductive reasoning.
• They are objective probabilities that can be determined by subjective reasoning.

Answer: C

Diff: 1

Question Status: Previous Edition

AACSB: Application of Knowledge

7) An individual's personal estimate of the chance of loss is a(n)

• objective probability.
• objective risk.
• subjective probability.
• a priori probability.

Answer: C

Diff: 1

Question Status: Previous Edition

AACSB: Application of Knowledge

8) A peril is

• a moral hazard.
• the cause of a loss.
• a condition that increases the chance of a loss.
• the probability that a loss will occur.

Answer: B

Diff: 1

Question Status: Previous Edition

AACSB: Application of Knowledge

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3 Copyright © 2020 Pearson Education, Inc.9) An earthquake is an example of a(n)

• moral hazard.
• peril.
• physical hazard.
• objective risk.

Answer: B

Diff: 1

Question Status: Previous Edition

AACSB: Reflective Thinking

10) Dense fog that increases the chance of an automobile accident is an example of a

• speculative risk.
• peril.
• physical hazard.
• moral hazard.

Answer: C

Diff: 1

Question Status: Previous Edition

AACSB: Reflective Thinking

11) Faking an accident to collect insurance proceeds is an example of

• physical hazard.
• objective risk.
• moral hazard.
• attitudinal hazard.

Answer: C

Diff: 1

Question Status: Previous Edition

AACSB: Reflective Thinking

12) Carelessness or indifference to a loss is an example of

• physical hazard.
• objective probability.
• moral hazard.
• attitudinal hazard.

Answer: D

Diff: 1

Question Status: Previous Edition

AACSB: Application of Knowledge

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