Assignment 1

Chapter 1: Risk and its treatment

5 marks

Answer the following questions:

1. Assume that the chance of loss is 3 percent for two different fleets of trucks. Explain how it is possible that objective risk for both fleets can be different even though the chance of loss is identical. (1 mark)

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2. Several types of risk are present in the UAE economy. For each of the following, identify the type of risk that is present. Explain your answer. (2 marks)

a. A house may be severely damaged in a fire.
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b. A family head may be totally disabled in a plant explosion.
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c. An investor purchases 100 shares of Emaar stock.
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d. A river that periodically overflows may cause substantial property damage to thousands of homes in the floodplain.
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e. Home buyers may be faced with higher mortgage payments if the Central Bank raises interest rates at its next meeting.
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3. There are several techniques available for managing risk. For each of the following risks, identify an appropriate technique, or combination of techniques, that would be appropriate for dealing with the risk. (2 marks)

a. A family head may die prematurely because of a heart attack.
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b. An individual’s home may be totally destroyed in a tornado.
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c. A new car may be severely damaged in an auto accident.
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d. A negligent motorist may be ordered to pay a substantial liability judgment to someone who is injured in an auto accident.
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e. A surgeon may be sued for medical malpractice.
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