BigDaddy U | CPCU 500 Module 9 Test Bank

12 Oct CPCU 500 Module 9 Test Bank

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1. Which one of the following represents a presentation of probability estimates of a set of criteria and possible outcomes?

A. Probability analysis.

B. Probability distribution.

C. Probability hypothetical.

D. Probability regression.

2. The most common basis of an analysis of loss exposures is:

A. Future predictions of loss exposures based on industry trends.

B. Information relating to past losses arising from similar loss exposures.

C. Future predictions of loss exposures based on geographic trends.

D. Information relating to past losses arising from organizations in a similar business.

3. Probabilities associated with coin tosses or dice throws can be developed using:

A. Static probability.

B. Theoretical probability.

C. Empirical probability.

D. Organic probability.

4. The number of 65-year-old females that are expected to die in the upcoming year can be determined using:

A. Empirical probability.

B. Theoretical probability.

C. Bona fide probability.

D. Post-dated probability.

5. Which one of the following statements is correct regarding the nature of probability?

A. Probabilities are typically expressed graphically, using a bar graph or pie chart.

B. Theoretical probability is developed based on actual experience.

C. Empirical probabilities are only estimates whose accuracy depends on the size of the samples.

D. Theoretical probability is the type of probability most commonly used by risk management professionals.

6. Which one of the following statements is correct regarding probabilities?

A. An empirical probability is based on logic.

B. Probability analysis is best suited for organizations with a small number of past losses.

C. Every probability distribution includes the probability of mutually exclusive, but not collectively exhaustive, outcomes.

D. Probabilities deduced solely from historical data may change as new data are discovered or the environment changes.

7. Which one of the following statements is correct regarding probabilities?

A. Discrete probability distributions have an infinite number of possible outcomes.

B. Theoretical probabilities can change as new data is discovered.

C. Empirical probabilities provide a mutually exclusive, collectively exhaustive list of outcomes.

D. The probability of an event that is absolutely certain is zero.

8. Which one of the following statements is correct regarding the law of large numbers?

A. It is only effective if the events being forecast are independent of one another and have occurred in the past under substantially identical conditions.

B. It states that the inaccuracy between the empirical frequency and the theoretical probability will increase as the sample size increases.

C. It indicates that as the uncertainty surrounding the expected results decreases, the likelihood decreases that the range of outcomes will vary widely.

D. It represents the tendency for individuals who are highly vulnerable to loss from a specific risk to be inclined to purchase insurance.

9. The law of large numbers can be used to more accurately forecast future events only when the events being forecast:

A. Have occurred in the past under changing conditions.

B. Can be expected to occur in the future under changing forces.

C. Are highly correlated and will continue to be limited in number.

D. Can be expected to occur in the future under the same, unchanging conditions.

10. Which one of the following statements is correct regarding the use of probability distributions?

A. Discrete probability distributions have an infinite number of possible outcomes and are typically used as severity distributions.

B. The sum of all event probabilities in a probability distribution must be equal to 1, or 100%.

C. Theoretical probabilities are mutually exclusive, while empirical probabilities are collectively exhaustive.

D. Probability distribution tables reflect probabilities for only the most probable event categories.

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11. Which one of the following statements is correct regarding empirical probability distributions?

A. Loss categories (bins) must be divided into equal sizes.

B. The sum of all resulting empirical probabilities must be equal to at least 75%.

C. There is no evident upper limit in size category of losses.

D. The category of loss outcomes are specific and observable.

12. Which one of the following statements is correct regarding continuous probability distributions?

A. They are typically used as frequency distributions.

B. They can be presented by dividing the distribution into a countable number of bins.

C. There is a finite number of possible outcomes.

D. They are most effective in depicting the number of outcomes.

13. The table below represents the probability distribution of physical damage to a home for a group of insured houses.

Size of Loss	Number of Losses	% of Losses
$0 - $10,000	16	40%
$10,001 - $20,000	14	35%
$20,001 - $30,000	8	20%
$30,001+	2	5%
Total	40	100%

Which one of the following statements is correct with respect to the information it provides?

A. There is a 60% probability of any loss being $10,000 or less.

B. This represents a theoretical probability distribution.

C. Maintaining a $10,000 deductible will eliminate 40% of total dollar losses.

D. This represents a continuous probability distribution.

14. The horizontal axis of this graph reflects possible outcomes, while the vertical access reflects the probability of that outcome.

Which one of the following statements is correct regarding this graph?

A. The most frequently occurring outcome is 17%.

B. It represents an empirical probability distribution.

C. The sum of all estimated probabilities of values is 66.

D. It represents a discrete probability distribution.

15. The less volatility a subject has, the:

A. Higher the standard deviation.

B. Lower the risk.

C. Higher the risk.

D. More likely the subject will need to be monitored.

16. Which one of the following statements is correct regarding a normal distribution?

A. When graphed, it will appear as a curve skewed either to the right or to the left.

B. It assigns some probability for each outcome, regardless of its distance from the mean.

C. It can be used to predict when losses, such as physical damages, will occur.

D. It indicates there is a less than 5% chance of having an outcome outside one standard deviation from the mean.

17. Tina is analyzing a probability distribution with the following outcomes:

Outcome 1: 5
Outcome 2: 5
Outcome 3: 6
Outcome 4: 7
Outcome 5: 8
Outcome 6: 8
Outcome 7: 8
Outcome 8: 10
Outcome 9: 15
Outcome 10: 18

The mean for this distribution is:

A. 7.

B. 8.

C. 9.

D. 10.

18. An underwriter is choosing between the following two accounts:

Account 1 – $3,500 mean loss and $3,300 standard deviation.
Account 2 – $2,100 mean loss and $2,800 standard deviation.

Based on these assumptions, the underwriter should select:

A. Account 1, because the coefficient of variation is lower.

B. Account 1, because the standard deviation is higher.

C. Account 2, because the standard deviation is lower.

D. Account 2, because the average loss is lower.

19. Assume 34.13% of all outcomes are within one standard deviation above the mean, and 13.59% of all outcomes are between one and two standard deviations above the mean. If the outcomes are normally distributed, what percentage is contained in the area between the mean and two standard deviations below the mean?

A. 20.54%.

B. 34.13%.

C. 47.72%.

D. 50%.

20. Assume 47.5% of all outcomes are within two standard deviations below the mean, and 2% of all outcomes are between two and three standard deviations below the mean. What percentage of all outcomes lies beyond three standard deviations above and below the mean?

A. 0.25%.

B. 0.5%.

C. 1.0%.

D. 2.0%.

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21. An insurer is beginning to write policies in a new state. Based on marketing information, the mean number of new claims is estimated to be 5,000, with a standard deviation of 1,000 in a normal distribution. If a claim representative can handle 600 claims per year, and the insurer wants 68% certainty that enough representatives have been hired, the insurer will need to hire:

A. 5 new representatives.

B. 10 new representatives.

C. 15 new representatives.

D. 20 new representatives.

22. An organization’s operations liability losses have a severity distribution with a mean of $20,000 and a standard deviation of $30,000. What is the coefficient of variation for this distribution?

A. 0.40

B. 0.67

C. 1.5

D. 1.93

23. Which one of the following represents a disadvantage of the Value at Risk (VaR)?

A. The results of the VaR are difficult to interpret.

B. It does not provide a quantification of the potential loss associated with a decision.

C. The extent to which a loss exceeds the VaR threshold is not accurately measured.

D. The VaR requires multiple inputs and results in multiple outputs.

24. Which one of the following represents a technique to quantify the probability of losing a specific amount that exceeds the Value at Risk (VaR) threshold?

A. Current ratio.

B. Return on equity.

C. Earnings at risk.

D. Conditional value at risk.

25. Determining earnings at risk (EaR) entails modeling the influence of factors such as:

A. Corporate management and other subjective variables that can be used for financial organizations.

B. Market risk inherent in the equities markets.

C. Changes in interest rates.

D. The variability of the organization’s stock price.

26. In determining earnings at risk, which one of the following statistical models is often used to understand the impact of risk and uncertainty?

A. Monte Carlo simulation.

B. Beta testing.

C. Jensen’s alpha index.

D. Value at risk.

27. Chuck has determined that there is a 90% chance he will not lose more than $150,000 in one day on his investment. What measure is being used for Chuck’s investment?

A. Standard deviation.

B. Coefficient of variation.

C. Value at risk.

D. Beta.

28. Jay has created a probability distribution for his organization that reflects a $100,000, 95% EaR, for a period of one year. Which one of the following statements is correct?

A. On average, earnings will be $5,000 per year.

B. Earnings are projected to be $100,000 or more 95% of the time.

C. Earnings are projected to be $100,000 or more 5% of the time.

D. On average, earnings will be $95,000 per year.

29. Which one of the following represents a type of trend analysis that is used to estimate relationships between variables?

A. Variability rating.

B. Risk analysis.

C. Regression analysis.

D. Prediction modeling.

30. An insured suffered an inventory loss three years ago. The adjuster is reviewing three years of the insured’s financial statements to project inventory values at the time of the loss. The adjuster is conducting:

A. Financial statement reconstruction.

B. Vertical analysis.

C. Ratio analysis.

D. Trend analysis.

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31. Which one of the following statements is correct regarding regression analysis?

A. In a regression analysis, the variable being forecast is the dependent variable.

B. Regression analysis can only be applied if the dependent variable increases over time.

C. A regression line tends to become more accurate the farther away it gets from the actual data values used.

D. Regression analysis assumes that the variable being forecast stays constant and does not change over time.

32. Constant Manufacturing Company has determined that its loss frequency has increased in the past four years as its production has increased. What should the company consider using to better forecast loss frequency?

A. Black-Sholes analysis.

B. Trend analysis.

C. Simulation analysis.

D. Theoretical probability analysis.

33. A manufacturing company is estimating the number of expected workers compensation claims next year using regression analysis. The company has assumed the following:

Y-intercept (dependent variable) – 3
Slope coefficient (m) - 1.5
Number of payroll hours in thousands (independent variable) – 70

Approximately how many workers compensation claims should be expected next year?

A. 71.5.

B. 74.5.

C. 108.

D. 315.

34. A manufacturing company is estimating expected workers compensation medical expenses based on company payroll. The company has assumed the following:

Y-intercept (dependent variable) – 6
Slope coefficient (m) - .095
Next year’s payroll (independent variable) - $3,600,000

Approximately what is the expected workers compensation medical costs for next year?

A. $57,000.

B. $342,006.

C. $626,000.

D. $3,420,000.

35. Which one of the following would a risk manager potentially use to examine the effectiveness of systems or risk control measures and to identify resources for improvements?

A. Decision tree analysis.

B. Event tree analysis.

C. Regression analysis.

D. Trend analysis.

36. Which one of the following statements is correct regarding event trees?

A. Event trees analyze the consequences of decisions.

B. Event trees provide only quantitative analysis.

C. Construction of event trees begins with identifying the decision under consideration.

D. Event trees typically provide only two options – failure or success.

37. Which one of the following would be considered an initiating event in an event tree analysis for a chemical plant?

A. A hole forms in one of the chemical storage tanks.

B. Leakage detectors in the chemical storage tank do not activate.

C. Toxic chemicals leak into the soil.

D. The chemical storage tank’s leakage barriers to not function correctly.

38. With respect to an event tree, the sum of all probabilities at the end of the diagram should equal:

A. 0.34.

B. 0.68.

C. 1.0.

D. 3.144.

39. Which one of the following statements is correct regarding decision trees and event trees?

A. Decision trees provide only qualitative information, while event trees provide only quantitative information.

B. Decision trees provide only quantitative information, while event trees provide only qualitative information.

C. Decision trees and event trees can provide only quantitative information.

D. Decision trees and event trees can provide both quantitative and qualitative information.

CPCU 500 Module 9 Test Bank

12 Oct CPCU 500 Module 9 Test Bank

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