Finance 4354
Test Questions
Chapter 1
1. You are an investment portfolio manager. Give two examples of diversifying risk.
(Section 3, Attitudes Towards Risks)
2. In terms of risk management, explain some reasons why a retirement investment in the
stock market is different from speculation in the stock market for profit? (Section 3,
Attitudes Towards Risks)
Chapter 2
1. Provide a few reasons why risk metrics are important in risk management. (Section
Introduction)
Chapter 3
1. Name at least two assumptions that utility theory uses? (Section 2, Utility Theory)
2. Give short definitions of the assumptions necessary for utility theory. (Section 2, Key
Takeaways)
3. What is the difference between monotonicity and convexity assumptions? (Section 2,
Key Takeaways)
4. What are the four axioms that utility theory is based on? (Section 2, Key Takeaways)
5. Explain probability as a measure of uncertainty. (Section 3, Uncertainty, Expected Value
and Fair Games)
6. List 5 reasons for companies hedging behavior. (Section 8, Why Corporations Hedge)
7. Why does systematic risk matter versus idiosyncratic risk? (Section 8, Why Corporations
Hedge)
Chapter 4
1. What are some guidelines that a risk manager might use? (Section 2, The Risk
Management Function)
2. What are some of the main steps in the risk management process? (Section 2, Key
Takeaways)
3. Why is it necessary to identify all of a firm’s risks (and their costs) in a very detailed
process? (Section 3.1, Identifying Risks)
4. Name some enterprise risks that may show up when doing risk mapping. (Section 3.1,
Identifying Risks – Risk Identification and Estimates of Frequency and Severity)
5. Name some examples of actions that a risk manager may take when taking a holistic
approach to risk management. (Section 3.1, Identifying Risks – Risk Identification and
Estimates of Frequency and Severity)
6. Consider the graph below.
7. What are the four basic risk categories that are illustrated? (Section 3.1, Identifying
Risks – Risk Identification and Estimates of Frequency and Severity)
8. Define what risk management information systems are. (Section 4.2, Risk Management
Information System)
9. What are the five main objectives to risk mapping? (Section 6.1, The Effect of Current
Risk-Handling Methods)
Chapter 5
1. In terms of risk management, what traits should a company have to be considered a
“good citizen”? (Section 2, Enterprise Risk Management within Firm Goals)
2. In terms of modern enterprise risk management, why is the environment a consideration?
(Section 2.1, Maximization of Firm’s Value for Sustainability)
3. In terms of risk management, why are financial statements important? (Section 3)
4. What are the two businesses that an insurance company is engaged in? (Section 3.2,
Financial Firm–An Insurer)
5. What are some of the differences between a financial firm and a non-financial firm?
(Section 3)
6. Name some reasons why catastrophe bonds, or CAT bonds, have been so hailed by the
insurance industry. (Section 4.2, Risk Management Using Capital Markets –
Securitization)
Chapter 6
1. When accepting the transfer of risk, what does the insurer promise it will do? (Section
2.1, Risk Transfer)
2. Besides money, what else could an insurer be obligated to provide to an insured?
(Section 2.1, How Insurance Works [Risk Transfer])
3. What are some examples of what an insurer cannot provide when the insurer accepts
risk? (Section 2.1, How Insurance Works [Risk Transfer])
4. Explain why the possibility of a catastrophic loss is not good for an insurer. (Section 3.3,
Small Possibility of Catastrophe)
5. What are some examples of government insurance? (Section 4.3, Private or Government
Insurance)
6. Describe or give examples of involuntary insurance. (Section 4.4, Voluntary or
Involuntary Insurance)
Chapter 7
1. The insurance industry has two distinctive yet equally important operations. What are
they? (Introduction)
2. What are some benefits of reinsurance? (Section 4, Key Takeaways)
Chapter 8
1. Besides the United States, name three of the top ten countries described to have led the
world in total insurance premiums paid. (Introduction)
2. Besides the organizational structure, what two items are important to know when
selecting an insurer? (Section 1, Links)
3. Name at least 3 common types of regulatory laws that insurance regulators oversee.
(Section 3, Insurance Regulation)
Chapter 9
1. Why can it be difficult for the insurer to limit the power of an agent (or broker) from
waiving provisions to an insured’s policy? (Section 2.1, Agents)
2. Under the doctrine of respondeat superior, why is this an issue for the insurers? (Section
2.1, Agent)
3. In terms of insurance, give an example of the consequences of estoppel. (Section 2.1,
Agents)
4. Describe agency by estoppel. (Section 2.1, Agents)
5. In a dispute over an insurance contract, why, more often than not, would the courts find
in favor of the insured instead of the insurer? (Section 4.2, Contracts of Adhesion)
6. In property and casualty insurance, what is the purpose of having an “other insurance
provisions” clause in an insurance contract? (Section 4.3, Indemnity Concept, Other
Insurance Provisions)
Chapter 10
1. What are the five major parts of an insurance policy? (Section 3, The Contract)
2. What is the purpose of imposing punitive damages? (Section 3.2, Insuring Clauses)
3. Name the classifications of exclusions that are manifested in limitations. (Section 3.3,
Exclusions and Exceptions)
4. Name at least three conditions that would be in an insurance contract. (Section 3.4,
Conditions)
Chapter 11
1. List a few types of risks covered under property insurance or property risk management.
(Introduction and Section 2, Property Risks)
2. What is the difference between real and personal property? (Section 2, Property Risks)
3. Name at least two reasons why insurers use deductibles in their policies. (Section 2, Key
Takeaways)
4. Name at least two risk categories associated with e-commerce property risk. (Section
3.1, Causes of Loss in E-Commerce)
5. What are some steps that a company can take to reduce risks of business interruption due
to e-commerce? (Section 3.2, Risk Management of E-Commerce Exposures)
6. What is the concern about electronic data and risk management? (Section 3, Key
Takeaways)
7. Name at least three examples of political risk. (Section 4, Global Property Exposures)
8. Describe at least three ways to tune up management of political risks. (Section 4, Table
4.1)
9. Name some risk insurance offerings that can alleviate issues of increased political risk.
(Section 4.5, Global Risk Management)
Chapter 12
1. In general terms of risk management, what are some liabilities that business may have?
(Section 1, Links)
2. What are the four elements of negligence? (Section 2.1, Basis of Liability)
3. Name at least two defenses against negligence. (Section 2.1, Basis of Liability)
4. Name two legal doctrines that can modify the law in favor of the plaintiff in a lawsuit.
(Section 2.1, Basis of Liability)
5. Name some principles that are the basis for product liability. (Section 3, Key
Takeaways)
6. Name some professionals who are more than likely to be exposed and in need of
professional liability in errors in omission coverage? (Section 3, Key Takeaways)
Chapter 13
1. Name at least two risks to your home. (Introduction)
2. Describe at least two of the common types of homeowners policy forms that insurers use.
(Section 2.1. Homeowners Policy Forms)
3. What are the three parts of a homeowners policy? (Section 2.1, Homeowners Policy
Forms)
4. Name some perils that would be covered in an HO-2 and HO-3 policy. (Section 2.1,
Homeowners Policy Forms)
5. Name at least two items where the insurer could provide additional coverage in the event
of a loss to the homeowner. (Section 2.2, The Special Form [HO-3])
6. Name at least two perils covered against direct loss under coverage C for personal
property. (Section 2.2, The Special Form [HO-3])
7. What is the typical reason an insurer would have an exclusion in a policy? (Section 2.2,
The Special Form [HO-3])
8. Name some typical exclusions that an insurer would issue in their homeowners policies.
(Section 2.2, The Special Form [HO-3])
9. Name some duties that an insured has after a homeowners loss. (Section 2.2, The Special
Form [HO-3])
10. What are some examples of personal injury covered by the personal injury endorsement?
(Section 3.5, Personal Injury Endorsement)
11. Why are floods typically excluded in homeowners policies? (Section 4.1, Flood Risk)
Chapter 14
1. Name some factors that have, somewhat, led to the decline of expenditures for auto
insurance claims. (Introduction)
2. Name some factors that have dimished efforts to reduce auto insurance rates?
(Introduction) (hard)
3. What are the six parts of a personal automobile policy (PAP)? (Section 4.1, Types of
Automobile Policies, The Personal Automobile Policy [PAP])
4. What are some exclusions that would typically appear in a personal automobile policy?
(Section 4.1, Types of Automobile Policies, Liability Coverage—Part A, Exclusions)
5. Name some factors that affect the pricing factors for auto insurance. (Section 5, Auto
Insurance Premium Rates)
6. Name at least two duties an insured must do after there is a loss or an accident. (Section
4.1, Duties After an Accident or Loss—Part E)
Chapter 15
1. Define a special causes of loss form. (Section 2.1, Commercial Property Coverages,
Causes of Loss, Causes of Loss—Special Form)
2. When losing your business property, explain the concept of extra expense coverage.
(Section 2.1, Commercial Property Coverages, Consequential Property Coverage:
Business Income Coverage [BIC], Extra Expense)
3. With the exception of debris removal, what are some additional coverages in the building
and personal property form? (Section 2.1, Commercial Property Coverages, Direct
Property Coverage: The Building and Personal Property [BPP] Form, Additional
Coverages and Coverage Extensions)
4. Name at least three causes of loss exclusions on the basic form. (Section 2.1,
Commercial Property Coverages, Causes of Loss, Causes of Loss—Basic Form)
5. Name at least two causes of loss exclusions on the broad form. (Section 2.1, Commercial
Property Coverages, Causes of Loss, Causes of Loss—Broad Form)
6. With the exception of aircraft, auto, watercraft, war, pollution, expected or intended
injury, and damage to property you own, rent or occupy — name at least three exclusions
to the bodily injury and property damage liability in your commercial general liability
policy. (Section 4.1, Commercial General Liability Policy, Coverages, Coverage ABodily Injury and Property Damage Liability)
Chapter 16
1. What are the three arguments that employers utilized to avoid assuming responsibility for
employees’ work-related injuries prior to the establishment of workers’ compensation
laws? (Section 2.1, History and Purpose)
2. Explain the definition of an occupational disease. (Section 2.2, Coverage, Covered
Injuries)
3. Name some of the factors that affect the amount and duration of indemnity payment.
(Section 2.3, Benefits, Income Replacement)
4. What parts make up a workers’ compensation policy? (Section 3.1, Workers’
Compensation Insurance, Coverage)
5. What are some factors that can affect the rate of workers’ compensation insurance?
(Section 3.1, Workers’ Compensation Insurance, Cost, Factors Affecting Rate)
6. Name the two goals any safety program should be designed to accomplish to prevent
workers’ compensation claims. (Section 3.1, Workers’ Compensation Insurance, Loss
Prevention and Reduction, Accident Prevention)
7. What are the types of losses that an industrial accident can cause for employers? (Section
3.2, Employer's Risk)
8. How do workers attempt to circumvent the exclusivity of compensation provisions in
workers’ compensation laws in order to get more benefits? (Section 4, Workers’
Compensation Issues)
9. Name at least three ways a worker can be disqualified from receiving unemployment
benefits. (Section 5.2, Coverage, Disqualifications)
Chapter 17
1. What are important advances in medicine that are expected in the future? (Section 4.2,
The Future of Medicine and Costs)
2. Name some prevalent contributing factors to causes of death for older age groups in
developed countries. (Section 4.2, The Future of Medicine and Costs)
3. Why does retirement seem the most pressing of issues in developing economies?
(Section 5.1, Demographic Changes Affecting Life Cycle Risks)
4. What is the likely retirement system of the future supposed to look like? (Section 5.1,
Demographic Changes Affecting Life Cycle Risks)
5. What characterizes the current United States system of retirement? (Section 5.1,
Demographic Changes Affecting Life Cycle Risks)
Chapter 18
1. Name at least two other social insurance programs that were added as a result of creating
Social Security. (Introduction)
2. What are some health benefits for the retired population? (Introduction)
3. What does OASDHI stand for? What parts make up OASDHI? (Section 2.1, Definition
of Social Insurance)
4. Why would you get more Social Security benefits by choosing to delay your retirement
beyond normal retirement age? (Section 2.2, Coverage and Eligibility Requirements,
Types of Benefits, Late Retirement)
5. Describe or define the Social Security’s system of pay-as-you-go. (Section 2.3,
Financing of Benefits, Trust Funds)
6. What are the three trust funds that Social Security benefits are allocated to once they are
collected? (Section 2.3, Financing of Benefits, Trust Funds)
7. What hospital-related benefits does Medicare Part A cover? (Section 3.1, Medicare Part
A: Hospital Insurance Program)
8. From the following, what does Medicare Part B cover? (Section 3.2, Medicare Parts B,
C, and D: Supplementary Medical Insurance Program)
9. What are some issues that affect Social Security as of 2000? (Section 4.1, Issues in
Social Security)
Chapter 20
1. Name at least three laws that affect employee benefits. (Introduction)
2. What are some questions that can be developed by employers to meet the employer’s
benefits objectives? (Section 2.2, Employer Objectives)
3. Name at least two examples of a group eligible for group insurance. (Section 3.2,
Underwriting, Characteristics of the Group as Key Underwriting Determinants, Reason
for the Group’s Existence)
4. Describe the role of the employer sharing of costs in terms of participating in group
benefits. (Section 3.2, Underwriting, Characteristics of the Group as Key Underwriting
Determinants, Source and Method of Premium Payment)
5. In terms of group benefits, describe what supplemental plans do. (Section 3.2,
Underwriting, Characteristics of the Group as Key Underwriting Determinants, Methods
of Determining Benefits)
6. What are some reasons that group insurance is less expensive than individual insurance?
(Section 3.3, Pricing)
7. What are some reasons that employers are attracted to flexible benefit plans? (Section
4.1, The Flexibility Issue)
8. Describe a flexible spending account.(Section 4.3, Flexible Spending Accounts)
9. Describe some federal laws that regulate non-discrimination in group benefits. (Section
5.1, Federal Regulation: Compliance with Nondiscrimination Laws)
10. Describe how the Civil Rights Act (amended 1978) affected employee benefits. (Section
5.1, Federal Regulation: Compliance with Nondiscrimination Laws, The Civil Rights
Act)
11. In terms of group benefits portability, describe COBRA. (Section 5.2, Benefits
Continuity and Portability)
Chapter 21
1. Name at least two requirements under the Pension Benefit Guaranty Corporation (PBGC)
to have a qualified pension plan. (Section 2.1, ERISA Requirements for Qualified
Pension Plans)
2. What is the definition of a controlled group for pension plans? (Section 2.2, Eligibility
and Coverage Requirements)
3. What are some benefits formulas that may be used in a traditional defined benefit plan?
(Section 3.1, Types of Qualified Plans, Defined Benefit Plans, Traditional Defined
Benefit Plan)
4. Describe how a Roth 401(k) and/or a Roth 403(b) works. (Section 3.1, Types of
Qualified Plans, Other Qualified Plans, Individual Retirement Accounts (IRAs), Roth
401(k) and Roth 403(b) Plans)
Chapter 22
1. Describe or name the cost containment techniques that can be used to control medical
costs. (Section 2.5, Coordination of Benefits, Cost Containment Initiatives for
Traditional Fee-for-Service Policies)
2. Describe the difference between disability income insurance and workers’ compensation
insurance. (Section 4.1, Disability Insurance)
3. Compared to older plans, what are some changes in today’s long-term care policies?
(Section 4.2, Long-Term Care Insurance, Individual Long-Term Care Insurance)
4. Describe the coverages in health savings account where the account may be used.
(Section 2.7, Other Health Plans, Health Savings Accounts [HSAs])
5. What are some of the levels of care that long-term care insurance would cover? (Section
4.2, Long-Term Care Insurance, Group Long-Term Care Insurance)
6. What are the requirements to receive long-term care benefits? (Section 4.2, Long-Term
Care Insurance, Individual Long-Term Care Insurance)