Risk Identification and Analysis Flashcards

Which of the following best describes the 'law of large numbers' as it applies to risk analysis?

Answer: As the number of similar, independent exposure units increases, actual results approach expected results

With more independent, homogeneous exposure units, the relative variation of actual losses from expected losses decreases.

A risk manager determines that the most a fire could reasonably cost under normal conditions is $2 million. This figure is BEST described as:

Answer: Probable maximum loss

Probable maximum loss is the largest loss likely to occur, whereas maximum possible loss is the worst-case total loss.

Which measure of central tendency is MOST affected by a single catastrophic loss in a data set?

Answer: Mean

The mean includes every value, so one extreme loss pulls it significantly, while the median and mode are more resistant.

Two loss distributions have the same mean, but Distribution A has a larger standard deviation. What can be concluded?

Answer: Distribution A's outcomes are less predictable

A larger standard deviation means greater dispersion around the mean, so outcomes are less predictable.

What is the coefficient of variation used for in risk analysis?

Answer: Comparing variability of distributions with different means

The coefficient of variation is standard deviation divided by mean, allowing relative variability comparisons across distributions.

A probability distribution of losses that has a long tail to the right is described as:

Answer: Positively skewed

Loss severity distributions are typically positively skewed, with many small losses and a few very large ones.

Which dimension of a loss exposure is MOST important when deciding whether a risk could threaten an organization's survival?

Answer: Severity

Severity, especially the maximum possible loss, determines whether a single event could be financially catastrophic.