1) ABC Health Insurance Company sells health insurance in one
state. Recently, that state’s legislature passed a law forbidding
health insurers from considering an individual’s health history
when selecting applicants to insure. This change in law will
increase the possibility of unprofitable results for ABC. This type
of hazard is an example of
A) physical hazard
B) attitudinal hazard
C) moral hazard
D) legal hazard
2) Five years ago, Shannon decided to start investing. She likes
ABC Telecom Company, and she invests in the company each month. As
ABC Telecom is the only company in which she invests, Shannon’s
financial well-being will be harmed if the price of ABC Telecom
stock drops significantly. The risk of investment loss can be
reduced if Shannon invests in other companies and other types of
financial assets. For Shannon, the risk she faces with regard to
her investments is a(n)
A) nondiversifiable risk
B) diversifiable risk
C) pure risk
D) enterprise risk
3) Which of the following statements regarding insurance and
hedging is true?
A) Both insurance and hedging reduce risk but do not involve the
transfer of risk.
B) Hedging reduces objective risk while insurance involves only
risk reduction and not risk transfer.
C) Insurance reduces objective risk while hedging involves only
risk transfer and not risk reduction.
D) Both insurance and hedging deal with pure risks.
4) Which of the following is a characteristic of insurance?
A) payment of intentional losses
B) avoidance of risk
C) certainty about specific losses that will occur
D) pooling of losses
5) Loss severity is defined as the
A) probable number of losses which may occur during some
period.
B) probability that particular piece of property may be totally
destroyed.
C) probable size of the losses which may occur during some
period.
D) probability that a liability judgment may exceed a firm’s net
worth.

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