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This posting addresses true and false risk management

True or False

1. Pure risk exists when there is uncertainty as to whether loss will occur.
2. If two companies have the same number of exposure units and experience the same average number of losses, then the degree of risk for each company tends to be equal.
3. Risk avoidance is a conscious decision not to expose oneself or one's firm to a particular risk.
4. Loss control may take the form of frequency reduction, severity reduction, or diversification.
5. Diversification across various businesses or geographic locations can serve as a form of risk transfer.
6. The present value of $600,000 in 3 years at 8 percent is $476,299.34.
7. A common method of handling a speculative risk is through the process called hedging.
8. Risks that are considered too great to retain and too expensive to transfer might be handled by means of risk retention.
9. Adjusted return of capital assesses how much capital would be required to keep the probability of bankruptcy below a specified level.
10. Subjective risk is the process of systematically managing risks through the following steps: identifying risks, evaluating risks, selecting risk management techniques, and implementing and reviewing decisions.
11.The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment.

Solution Preview

1. Pure risk exists when there is uncertainty as to whether loss will occur. FALSE, it occurs when there is a possibility of loss, but the extent of the loss is unknown.

2. If two companies have the same number of exposure units and experience the same average number of losses, then the degree of risk for each company tends to be equal. FALSE, It would depend on the circumstances of the loss.

3. Risk avoidance is a conscious decision not to expose oneself ...

Solution Summary

The solution answers true and false questions for risk management, that deal with pure risk, risk avoidance, subjective risk, rates of return, and related areas.

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