Chapter 2

Question 1

Balance sheet

Answer 1

The financial statement that reports the assets, liabilities, and owners’ equity of an organization as of a specific date

Question 2

Income statement

Answer 2

The financial statement that reports an organization’s profit or loss for a specific period by comparing the revenues generated with the expenses incurred to produce those revenues

Question 3

Statement of cash flows

Answer 3

The financial statement that summarizes the cash effects of an organization’s operating, investing, and financing activities during a specific period

Question 4

Hold-harmless (indemnity) agreement

Answer 4

A contractual provision that obligates one of the parties to assume the legal liability of another party

Question 5

Indemnification

Answer 5

The process of restoring an individual or organization to a pre-loss financial condition

Question 6

Hazard analysis

Answer 6

A method of analysis that identifies conditions that increase the frequency or severity of loss

Question 7

Theoretical probability

Answer 7

Probability that is based on theoretical principles rather than on actual experience

Question 8

Empirical (a posteriori) probability

Answer 8

A probability measure that is based on actual experience through historical data or from the observation of facts

Question 9

Probability analysis

Answer 9

A technique for forecasting events, such as accidental and business losses, on the assumption that they are governed by an unchanging probability distribution

Question 10

Law of large numbers

Answer 10

A mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases

Question 11

Probability distribution

Answer 11

A presentation (table, chart, graph) of probability estimates of a particular set of circumstances and of the probability of each possible outcome

Question 12

Central tendency

Answer 12

The single outcome that is the most representative of all possible outcomes included within a probability distribution

Question 13

Expected value

Answer 13

The weighted average of all of the possible outcomes of a probability distribution

Question 14

Mean

Answer 14

The sum of the values in a data set divided by the number of values

Question 15

Median

Answer 15

The value at the midpoint of a sequential data set with an odd number of values, or the mean of the two middle values of a sequential data set with an even number of values

Question 16

Mode

Answer 16

The most frequently occurring value in a distribution

Question 17

Dispersion

Answer 17

The variation among values in a distribution

Question 18

Standard deviation

Answer 18

A measure of dispersion between the values in a distribution and the expected value (or mean) of that distribution, calculated by taking the square root of the variance

Question 19

Coefficient of variation

Answer 19

A measure of dispersion calculated by dividing a distribution’s standard deviation by its mean

Question 20

Normal distribution

Answer 20

A probability distribution that, when graphed, generates a bell-shaped curve