Finance Test Bank Questions, Chapter 11

Risk Management and Portfolio Concepts

• Identifying a group of assets to eliminate portfolio risk is challenging due to:

  • Limited asset types available to individual investors.
  • Inability to hedge lifetime income streams known as human assets.
  • Portfolio return volatility over time.

• Households revise portfolios to develop a risk/return strategy that:

  • Minimizes risk while maintaining living standards.
  • Avoids audits by tax authorities.
  • Optimizes income for the highest possible standard of living.

• Risk can be viewed as:

  • Probability of a loss or underperforming outcome.
  • Inability to hedge against losses.
  • Likelihood of more unfavorable outcomes than favorable ones.

• Risk management is defined as:

  • Identifying risks and controlling them to achieve personal goals.
  • Not eliminating risks entirely but managing exposure effectively.

Risk Management Process

• The third step of the risk management process involves:

  • Matching appropriate tools to the identified risks.

• Common risk management approaches include:

  • Avoiding, reducing, retaining, and sharing risk.
  • Strategies adapt based on the specific circumstances of the risk.

• Self-insurance is characterized by:

  • Setting aside funds proactively for potential losses.

• Factors influencing the choice of risk management tools comprise:

  • Costs, likelihood of loss, convenience, and personal risk tolerance.

Human-Related Assets and Longevity Risks

• Risks linked to human-related assets include:

  • Longevity (premature death and extended life).
  • Health issues and disabilities.
  • Economic risks at both macro and micro levels.

• Longevity risk entails:

  • The possibility of living longer than expected or dying prematurely.

Insurance Insights

• Medigap insurance covers:

  • Medical expenses not reimbursed by government programs.

• Tangible assets owned by households are categorized as:

  • Real, human, and financial assets.

• Maintenance expenses represent:

  • Tangible liabilities affecting overall financial health.

• Inefficiencies in insurance products stem from:

  • Overhead, search, and underwriting costs as well as incomplete information.

• Search costs describe:

  • Expenses incurred by insured individuals to find optimal policies.

• Major insurance policy types include:

  • Private personal, property, and government coverage.

Insurance Policies and Providers

• Categories providing replacement income for the incapacitated include:

  • Disability insurance.

• Major providers of insurance consist of:

  • Government and private companies through group and individual policies.

• Group policies often have reduced premiums due to:

  • Lower marketing and administrative costs, benefiting from mass volume.

• Individual insurance policy advantages entail:

  • Flexibility, portability, and potential tax benefits.

Insurance Assessment and Life Insurance

• Quality assessment criteria for insurance companies involve:

  • Financial strength, operational effectiveness, and size.

• Human-related risk factors include:

  • Health and integrity of pension assets.

• Risk management tools for anticipated gifts consist of:

  • Precautionary savings and diversification strategies.

• Key components of insurance policies usually encompass:

  • Mortality charges and investment returns.

• Life insurance types distinguished include:

  • Term, whole, universal, and variable life policies.

• A policy's guarantee to remain in effect irrespective of insured health is termed:

  • Renewable term.

• Whole life policy strengths include:

  • Stable premiums, effective savings components, and consistent cash benefits.

Risk Management and Portfolio Concepts

• Identifying a group of assets to eliminate portfolio risk is challenging due to:

  • Limited asset types available to individual investors.
  • Inability to hedge lifetime income streams known as human assets.
  • Portfolio return volatility over time.

• Households revise portfolios to develop a risk/return strategy that:

  • Minimizes risk while maintaining living standards.
  • Avoids audits by tax authorities.
  • Optimizes income for the highest possible standard of living.

• Risk can be viewed as:

  • Probability of a loss or underperforming outcome.
  • Inability to hedge against losses.
  • Likelihood of more unfavorable outcomes than favorable ones.

• Risk management is defined as:

  • Identifying risks and controlling them to achieve personal goals.
  • Not eliminating risks entirely but managing exposure effectively.

Risk Management Process

• The third step of the risk management process involves:

  • Matching appropriate tools to the identified risks.

• Common risk management approaches include:

  • Avoiding, reducing, retaining, and sharing risk.
  • Strategies adapt based on the specific circumstances of the risk.

• Self-insurance is characterized by:

  • Setting aside funds proactively for potential losses.

• Factors influencing the choice of risk management tools comprise:

  • Costs, likelihood of loss, convenience, and personal risk tolerance.

Human-Related Assets and Longevity Risks

• Risks linked to human-related assets include:

  • Longevity (premature death and extended life).
  • Health issues and disabilities.
  • Economic risks at both macro and micro levels.

• Longevity risk entails:

  • The possibility of living longer than expected or dying prematurely.

Insurance Insights

• Medigap insurance covers:

  • Medical expenses not reimbursed by government programs.

• Tangible assets owned by households are categorized as:

  • Real, human, and financial assets.

• Maintenance expenses represent:

  • Tangible liabilities affecting overall financial health.

• Inefficiencies in insurance products stem from:

  • Overhead, search, and underwriting costs as well as incomplete information.

• Search costs describe:

  • Expenses incurred by insured individuals to find optimal policies.

• Major insurance policy types include:

  • Private personal, property, and government coverage.

Insurance Policies and Providers

• Categories providing replacement income for the incapacitated include:

  • Disability insurance.

• Major providers of insurance consist of:

  • Government and private companies through group and individual policies.

• Group policies often have reduced premiums due to:

  • Lower marketing and administrative costs, benefiting from mass volume.

• Individual insurance policy advantages entail:

  • Flexibility, portability, and potential tax benefits.

Insurance Assessment and Life Insurance

• Quality assessment criteria for insurance companies involve:

  • Financial strength, operational effectiveness, and size.

• Human-related risk factors include:

  • Health and integrity of pension assets.

• Risk management tools for anticipated gifts consist of:

  • Precautionary savings and diversification strategies.

• Key components of insurance policies usually encompass:

  • Mortality charges and investment returns.

• Life insurance types distinguished include:

  • Term, whole, universal, and variable life policies.

• A policy's guarantee to remain in effect irrespective of insured health is termed:

  • Renewable term.

• Whole life policy strengths include:

  • Stable premiums, effective savings components, and consistent cash benefits.

Explore fundamental concepts in finance with this quiz based on Chapter 11. Test your understanding of portfolio risk, asset management, and the challenges faced by investors. This quiz is ideal for students and professionals looking to deepen their financial knowledge.