RISK FINANCING

MULTIPLE CHOICE

1) Decision making strategies that works well under uncertainty and evolved over time to overcome complexity of real-world situations and limited computational resources are based on...

a.

rational decision making.

b.

simple rules-of-thumb.

2) Which one of the following statements is the most correct? The capital of an enterprise is adequate when the...

a.

capital equals required capital.

b.

signaling capital satisfies the rating agencies.

c.

risk capital can cover all the risks.

3) After a large loss, an enterprise may be forced to...

a.

sell assets in unfavourable markets, lose valuable employees and lose customers.

b.

lose valuable employees and lose customers.

c.

scale back operations, sell assets in unfavourable markets, lose valuable employees and lose customers.

4) The difference between the interactive and reflexive models used in financial systems and complex and dynamic systems such as weather and climate are that...

a.

financial systems are mostly independent of the models one sues to make predictions about future states.

b.

financial systems are mostly dependent of the models one sues to make predictions about future states.

5) A strategy map is...

a.

an illustration of the strategy of the enterprise.

b.

a visual interface to optimise an enterprise risk management framework.

6) Decision trees can be used in risk to...

a.

identify optimal dynamic strategies under uncertainty.

b.

describe risk events.

7) The role of risk management in strategic decision making is to ...

a.

timeously communicate the information to the board and executive management, to assess the consequences of retaining risks.

b.

identify the organisation's competitive advantage when taking investment decisions.

c.

communicate the type of risks the organisation should take.

d.

inform top management about the risks investors are willing to take.

8) A combination of strategy maps and scenario analysis can lead to...

a.

visualizing how different parts of the enterprise contributes to the overall performance of the enterprise.

b.

considering qualitative and quantitative aspects of possible future states.

9) Scenarios can be described as a tool to order perceptions about alternative future environments in which decisions can play out. The purposes that scenarios can serve can include...

a.

the assessment of the resilience of core competencies of the enterprise and to create better strategic alternatives.

b.

risk and return analyses that incorporate uncertainties by changing several variables at a time without keeping other variables constant.

c.

exploring the simultaneous effect of multiple uncertainties.

10) Authors distinguish between real capital and financial capital. Real capital can be described as...

a.

those assets in which the enterprise invests as part of its primary business.

b.

an option on paid-in capital.

c.

the collection of liabilities to fund its acquisition of investment capital.

11) You have to estimate the ... for every state of nature to use the ... valueapproach.

Answer: .... .....

12) The time taken to do minor check-ups on small cars is found to be normallydistributed with a mean time of 30 minutes and a standard deviation of 5minutes. What is the time limit for checking a car if no more than 10% of checksexceed this limit?

a.

6,00 minutes

b.

1,28 minutes

c.

36,40 minutes

d.

3,00 minutes

13) Real options can be described or defined as...

a.

the right, but not the obligation to take a future specified action at a specified cost.

b.

opportunities to purchase assets on possibly favourable terms.

14) Challenges that may present itself when developing scenarios are that scenarios are...

a.

outputs are non-quantifiable, reflect current conditions and may lack a shared strategy.

b.

imaginative guesswork, outputs are quantifiable, reflect current conditions and biases.

15) Which one of the following statements are the most correct? Training yourself to think probabilistically can ...

a.

make decisions quicker.

b.

help you to avoid mistakes.

16) The process for real option analysis consists of...

a.

risk identification, evaluation, controlling, financing, monitoring and reporting.

b.

structuring the problem, evaluate and modelling and implementation planning.

17) Strategic net present value differs from traditional net present value in that...

a.

strategic net present value illustrate the trade-offs from competing courses of action.

b.

strategic net present value is focusing on pre-set strategies from competing courses of action.

18) A limitation of heuristics is that it...

a.

provides limited general-purpose strategies that can be applied to all problems under all circumstances.

b.

needs extensive deliberation and data.

19) Factors that determine the degree of uncertainty and the accuracy of predictions are the...

a.

available amount of data, type of model to be used and the structure of the decision environment.

b.

available amount of relevant data, type of model to be used and the structure of the decision environment.

20) An ... in decision analysis is defined as an action that may be chosen.

Answer: ....

21) Cost benefit analysis can be used for the identification of ...

a.

risk mitigation strategies for optimalisation of implementation and risk reduction strategies.

b.

risk mitigation strategies for optimalisation of corporate asset allocation strategies.

22) A reason why an enterprise wants to use options is that...

a.

it wants to take some future specified action at a specific cost.

b.

there is decision asymmetry to take future decisions.

23) The economic capital of the enterprise consists of...

a.

risk and signaling capital.

b.

operational and risk capital.

24) Enterprise risk management is enhanced when decision making...

a.

incorporates dependence modelling.

b.

analyses the different risk registers of the enterprise.

25) Most of the capital structure models assume that normal operational business conditions and cash flows are based on historical ranges of interest rate and foreign exchange volatility. The effect on the capital structure of the enterprise when a severe business interruption event materialises can be...

a.

all of the above.

b.

the inability to raise unsecured debt in the capital market at even unreasonable cost.

c.

loss of equity investor confidence.

d.

operating problems compounded by loss of flexibility and liquidity.

26) Which one of the following statements is the most correct? Risk capital can be described as the amount of capital...

a.

in addition to the operational capital to cover the financial consequences of its business risk.

b.

required to cover the financial consequences of its business risk.

c.

to stay in business.

27) A portfolio of assets has a 95% chance of producing a return of 15% over the next 12 months. A scenario analysis indicates that there is a 1% of a loss of 65%. The expected return is...

a.

0.065%

b.

14,25%

c.

13.60%

d.

None of the above.

28) The key thing to understand is that business, and the business of life, can accurately be described as...

a.

decision-making under conditions of uncertainty.

b.

the ability of decision-makers who produced good outcomes are better than those who produced bad outcomes.

c.

probable impossibilities are to be preferred to improbable possibilities.

29) The first step in making a good decision is to define the...

Answer: ...

30) Defining the level of risk appetite is the responsibility of ...

a.

the board and assurance providers.

b.

executive management and board risk committee.

c.

the board and executive management.

d.

assurance providers, such as compliance, internal audit and risk committee.

31) Fast and frugal decision trees (FFT) differ from a standard classification decision trees in that...

a.

FFTs do not consider each node in isolation.

b.

FFTs restrict each node to two child nodes.

32) The average Benefit-Cost Ratio (BCR) is calculated by...

a.

ordering projects from low to high cost and using the first project as the referencing project.

b.

total benefits over total cost associated with each project.

33) In an organisation, the decision on whether to take risks rests with the .........

a.

chief risk officer.

b.

chief executive officer.

c.

internal audit

d.

risk committee.

34) A square in a decision tree represents a ... node.

Answer: ...

35) Outcomes that the decision maker do not have any control over is called...

Answer: ...

36) Economic capital consists of...

a.

operational capital + risk capital + signalling capital.

b.

operational capital + risk capital.

c.

paid-up capital + off-balance-sheet capital.

37) A circle depicts a ... node in a decision tree.

Answer: ...

38) The role of corporate capital is to...

a.

fund its operations.

b.

to provide a buffer against adverse events.

c.

to serve as a signal of financial soundness and fund its operations.

39) The role of risk management in the organisation is to ...

a.

identify, evaluate and implement risk mitigation interventions with senior management and the board.

b.

identify, evaluate and assess risks of the organisation.

c.

identify, evaluate and communicate risks to senior management.

d.

identify, evaluate and implement risk mitigation interventions with senior management.

40) One of the benefits of strategy maps is that it can help to select leading performance indicators as...

a.

strategy maps assist management to visualize how performance indicators translate the strategy into operational terms.

b.

performance indicators can be linked to cause and effect relationships.

41) The term "planning fallacy" refers to the tendency to...

a.

confound elegant plans under conditions of uncertainty.

b.

over-estimate the chances of success.

c.

underestimate the time it takes to complete any project.

42) The components of the cost of risk consists of...

a.

direct insurance cost, claims cost and salaries of sales staff.

b.

insurance cost, administration cost, unreimbursed losses and risk control costs.

43) The total capital of an enterprise consists of the sum of ... capital.

a.

operational, market and credit risk

b.

operational, signalling and risk

44) The phenomenon that commentators who possess information about the outcome of a decision will tend to evaluate it very differently than the people who only have the information that managers and/or engineers had at the time they made the decision is a example of ... bias.

a.

conjunctive/disjunctive

b.

hindsight

c.

uncertainty

d.

outcome

45) Thirty chief executive officers in a certain industry are classified by age and theirprevious functional positions as shown below.

Previous functionalposition	Under 55 years	55 yearsand older	Total
Finance	5	13	18
Marketing	2	4	6
Other	2	4	6
Total	9	21	30

Suppose an executive is selected at random from this group.What is the probability that the executive is under 55 years and the previousposition was in finance?

a.

5/30

b.

18/30

c.

5/18

d.

6/10

46) A grinding mill in the Free State Province breaks down on average 5 times amonth.What is the probability that the mill will not break down in a month?

a.

0,400

b.

0,0500

c.

0,0067

d.

0,0670

47) ABC (Pty)Ltd is an SME furniture retailing business. On the 1^st of January 2021, the premises were subject to a serious fire which destroyed the building, all contents and stock. Despite an effort to find alternative temporary premises, nothing suitable could be located before the expiry of the maximum indemnity period (MIP). The insured are tenants in the building and only insure Contents, Stock and BI under their policy. There is a cessation of rent clause within the lease with the landlord. The policy is subject to average.

BI insurance is provided as follows:

• Gross Profit sum insured R200,000
• Maximum Indemnity Period 12 months
• Uninsured Working Expenses as stated in the policy are:
• Purchases, net of stock movement
• Delivery charges
• Bad debts

The company continued to pay staff during the interruption period and all other costs remained.

Turnover for the years before the fire was as follows:

• 2018 R959,591
• 2019 R1,165,775
• 2020 R1,088,819

Accounts for the year ending 31 December 2020:

Sales	R1,088,819
Finance Commission
Income from concession
Turnover		R1,088,819
Opening stock	R21,367
Production wages	R71,494
Purchases	R608,323
Closing stock	-R22,646
Cost of sales		R678,538
Gross profit		R410,281
Wages and salaries	R126,368
Rent	R44,068
Rates	R73,678
Delivery charges	R36,422
Utilities	R8,507
Cleaning	R372
Waste disposal	R779
Repairs and maintenance	R2,912
Communication	R2,481
Advertising	R37,198
Bad debts	R2,500
Credit card charges	R548
Depreciation	R1,015
Total overheads		R336,848
Net profit		R73,433

1. The calculated trend between the turnover for 2019 and 2020 is .......... %.

Enter the amount, either negative (e.g., -5.67) or positive (e.g., 5.67), rounded to two decimals. The percentage sign should not be added to the answer.

2.The calculated rate of gross profit for 2020 is ....... %.

Enter the amount, either negative (e.g., -5.67) or positive (e.g., 5.67), rounded to two decimals. The percentage sign should not be added to the answer.

3.The calculate net loss before the average for 2020 is R ......

Enter a numerical number without spaces or commas for thousand separators (E.g 172224000). Do not add the denomination to the answer.

4.The calculate net loss after average (if applicable) for 2020 is R ....

Enter a numerical number without spaces or commas for thousand separators (E.g 172224000). Do not add the denomination to the answer.

48) The decision to take risks depends on the ...

a.

level of risk appetite and risk tolerance.

b.

strength of the organisation and promising investment opportunities.

c.

availability of risk capital and promising investment opportunities.

d.

level of risk appetite and promising investment opportunities.

49) The role of risk management includes the...

a.

identification and evaluation, decision to take the risk, reporting, monitoring and manage of risks.

b.

identification and evaluation, reporting, monitoring and manage of risks.

c.

identification and evaluation, setting the risk appetite, reporting, monitoring and manage of risks.

50) One can distinguish between two conceptually distinct types of decision scenarios that are, situations of risk and situations of uncertainty. A situation of risk is characterised by...

a.

the outcome probabilities are not logically deductible.

b.

the existence of an objective basis to derive outcome probabilities.

* PLEASE ANSWER ALL QUESTIONS VERY ACCURATELY, TAKE YOUR TIME *