Risk 1

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1 Risk Chapter and Its Management Multiple Choice

1. The major types of business risk include all of the following except:
A price risk
B diversification risk
C pure risk
D credit risk

Answer: b Type: K

2. Credit risk is
a. : the risk that a firms borrowers will not make promised payments.
b. the risk that a firm will not be able to get credit from lenders
c. the risk that a firm will not have sufficient funds to make payments to their creditors
d. the risk due to changes in output and input prices

3. All of the following are types of price risk except:
a. commodity price risk
b. exchange rate risk
c. stock price risk
d. interest rate risk

Ans: c

4. Which of the following is not an example of a direct
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The risk that a firms customers and parties to which it has lent money will fail to make promised payments is known as credit risk.

2. The three major risk management methods are financing , and internal risk reduction

3. Reducing the level of risk activity and increasing precautions against the loss are the two major approaches to loss control .

4 loss control . , loss 4. T

Three methods of financing losses are: retention , insurance , and hedging . (Answer could also include other contractual risk transfers.)

5. The major types of risk that produce fluctuations in cash flows and business value are price risk, credit risk, and pure risk. II.

1. Problems and Short Answer Questions

What are the most important characteristics of pure risk as compared to other types of risk?

Answer: The most important characteristics of pure risk include: a) the losses have the potential to be large relative to the business resources; b) the underlying causes are company-specific and the firm can take actions to reduce frequency and severity; c) they are often insurable; and d) there are not usually any offsetting gains to other parties. Type: K

2. Provide a brief outline of the steps in the risk management process.

Answer: The key steps in the risk management process are: a) identify the risks; b) evaluate the potential frequency and severity of the losses; c) select the risk management methods to be used; d) implement the risk
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