CFA Level I · CFA Level I Exam · Introduction to Risk Management
A company buys a property insurance policy covering fire damage to its warehouse and pays a fixed annual premium. This action is best described as risk:
This is risk transfer. The company pays a premium so the insurer bears the financial loss if a fire occurs. The firm still operates the warehouse, so it has not avoided the risk, and the policy does nothing to reduce the chance of a fire, so it is not prevention.
- ATransferCorrect
- BAvoidance
- CPrevention
Explanation
Paying a premium moves the financial consequences of a fire loss to the insurer, which is risk transfer. The company keeps using the warehouse, so it is not avoidance. The policy does not make a fire less likely, so it is not prevention.
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