ARM 400 Practice Exam Download

ARM™ 400 Practice Exam
Presented by: AssociatePI

1. Which of the following exemplifies step four of the
risk-management process?
A. ABX Company purchases commercial property insurance

for their new warehouse.
B. Jake, a risk-management professional, analyzes the ABX
Company's internal and external threats to identify potential
loss exposures.
C. The ABX risk-management team makes a list of all risks
faced by the organization.
D. Mindy, a risk-management analyst for ABX Company,
revises the current risk-management plan to better reduce
the risk of fire loss exposure.
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2. Big Tech Company has developed an algorithm for the
insurance industry that syncs with industry claims data to
provide a more accurate insurance quote based on the quoted
policyholder’s likelihood to incur a claim. The algorithm
continually learns from new quote data as more policyholders
are quoted using the algorithm and as more claims data is
gathered. This is an example of what?
A. Neural network
B. Regression analysis
C. Unstructured data
D. Data science

3. Which of the following is an example of diversifiable
risk?
A. Most of John’s 401k is invested in a technology-focused

mutual fund when stock markets around the world plummet
due to a global employment strike.
B. Melanie owns shares in all of the major automotive
companies when chromium miners go on strike,
interrupting the production of safety sensors for the
industry.
C. Bill owns shares of XYZ Textile Company. The share price
of XYZ Textile drops 40% when their CEO unexpectedly
retires.
D. A rising unemployment rate causes a 10% drop in the stock
market.

4. Life Safety Enterprises (LSE) has identified six core
principles of data quality. These characteristics include
A. Accuracy, completeness, and validity

B. Collaboration, accuracy, and comprehensiveness.
C. Model, data sampling, and data lineage.
D. Timeliness, validity, and administration.

5. Following a flood and a three-month repair period,
Retro Retailer sets a five-year goal to generate a minimum
of $100,000 per quarter in every quarter. What type of goal
is this?
A. Profitability
B. Continuous operations
C. Earnings stability
D. Social responsibility

6. Tammy is 60 years old and has $1,200,000 in her
retirement portfolio. Her investment in blue-chip common
stocks remains the same, but each year she moves more
of her investments out of aggressive growth mutual funds
and into government bond markets and municipalities.
Peter had $250,000 in a savings account with his local
bank when news broke about political unrest in a
neighboring country. When Peter saw on the news that
global stock markets dropped 15% as a result of the
political unrest, he went to his bank to withdraw all of his
money. Who is reacting to subjective risk concerns?
A. Only Tammy is reacting to subjective risk.
B. Only Peter is reacting to subjective risk.
C. Tammy and Peter are both reacting to subjective risk.
D. Neither Tammy nor Peter are reacting to subjective risk.

7. Barry is an underwriter for HomeSFE Insurance. He is
inspecting a commercial property to determine the hazard
risks presented by the location, and the risk faced by the
insurance company. Barry’s biggest concern is the roof of
the property. The roof has a steep slope and looks to be
damaged. Which of the following smart products would be
best for Barry to use in this scenario?
A.Drone
B.Computer vision
C.Robotics
D.Sensors

8. Jessica, CEO of Integrity Pharmaceuticals, introduces
new ideas by linking them to familiar concepts that would
be understood by the whole company. Her goal is to help
the entire organization understand her ideas. This is an
example of which aspect of effective risk management
communication?
A. Linking familiar ideas

B. Feedback
C. Repeat for clarity
D. Common language

9. Ricky, a compliance specialist, is analyzing the state of
Florida statutes and regulations to ensure BYB Company has
not violated local laws with their new manufacturing plant
operating in Orlando Florida. What layer in the three lines of
defense model is this?
A. First Line of Defense

B. Second Line of Defense
C. Third Line of Defense
D. Fourth Line of Defense

10. Which of the following is true regarding BCM?
A. BCM considers both physical property and all other effects

that a disaster could have on a company.
B. BCM only focuses on internal damage to the firm, such as
financial crisis after a loss.
C. BCM is always a separate function from the risk
management department.
D. BCM manages hazard risk only.

ARM™ 400 Exam Answers
Presented by: AssociatePI

1. Which of the following exemplifies step four of the risk-management process?
A. ABX Company purchases commercial property insurance for their new warehouse.
B. Jake, a risk-management professional, analyzes the ABX Company's internal and external threats to
identify potential loss exposures.
C. The ABX risk-management team makes a list of all risks faced by the organization.
D. Mindy, a risk-management analyst for ABX Company, revises the current risk-management plan to
better reduce the risk of fire loss exposure.
Answer Explanation:
Purchasing insurance is an example of step four in the risk-management process.
Step 4: Treat the Risks – Once the risk is analyzed, a risk-management treatment must be selected and
implemented to mitigate the risk. Implementation means the individual or organization takes action on the
plan and works to apply their chosen risk-management techniques. For example, purchasing and
installing loss-preventing devices and purchasing insurance is considered implementing risk
management.
The risk-management process is made up of a few key steps and activities. The key risk-management
activities that make up the risk-management process include these:
• Step 1: Scan the environment for risks (scan, review, and analyze the risk environment).
• Step 2: Identify the risks (identify any exposures or risks).
• Step 3: Analyze the risks (analyze exposures and risks).
• Step 4: Treat the risks (apply risk treatment).
• Step 5: Monitor the risks.

2. Big Tech Company has developed an algorithm for the insurance industry that syncs with industry claims
data to provide a more accurate insurance quote based on the quoted policyholder’s likelihood to incur a
claim. The algorithm continually learns from new quote data as more policyholders are quoted using the
algorithm and as more claims data is gathered. This is an example of what?
A. Neural network
B. Regression analysis
C. Unstructured data
D. Data science
Answer Explanation:
Neural network is a computer system modeled on the human brain and nervous system; this is a form of
artificial intelligence. The computer continually learns and teaches itself to learn from history and new data,
helping the computer make better decisions. This is also called deep learning.

3. Which of the following is an example of diversifiable risk?
A. Most of John’s 401k is invested in a technology-focused mutual fund when stock markets around the
world plummet due to a global employment strike.
B. Melanie owns shares in all of the major automotive companies when chromium miners go on strike,
interrupting the production of safety sensors for the industry.
C. Bill owns shares of XYZ Textile Company. The share price of XYZ Textile drops 40% when their
CEO unexpectedly retires.
D. A rising unemployment rate causes a 10% drop in the stock market.
Answer Explanation:
Diversifiable risk is the risk that only affects some individuals or organizations. This is a risk that can be
avoided through diversification. Nondiversifiable risk is the risk that affects the entire market. This affects all
individuals and organizations. This cannot be avoided through diversification.
In this case, Bill’s investment in XYZ Textile Company is diversifiable. The retirement of the CEO will only
affect XYZ Company; it will not affect all companies in the market.
The other answer options in this case all exemplify Nondiversifiable risk.
• A global employment strike—this is nondiversifiable; this affects the entire market.
• Chromium miners go on strike, interrupting the production of safety sensors for the industry. This is
nondiversifiable; this affects the entire industry of auto manufacturers.
• A rising unemployment rate causes a 10% drop in the stock market. This is nondiversifiable; a high
unemployment rate has a negative effect on the entire industry.

4. Life Safety Enterprises (LSE) has identified six core principles of data quality. These characteristics
include
A. Accuracy, completeness, and validity

B. Collaboration, accuracy, and comprehensiveness.
C. Model, data sampling, and data lineage.
D. Timeliness, validity, and administration.
Answer Explanation:
There are six core principles of data quality.
• Accuracy. Accuracy means a lack of error, but accuracy also measures the value of data in relation to
the information analyzed.
• Completeness. Completeness refers to how comprehensive the set of data considered is, and if it
reflects all information needed for the analysis.
• Data lineage. This systematic process traces data from its source to its destination. It identifies all
inconsistent or inaccurate data.
• Reasonability. The reasonability of data is determined by how material or relevant it is to a business
objective.
• Timeliness. This refers to how accessible data is compared to when an organization needs to use it.
• Validity. Data validity is a relative measure (rather than an absolute). It means data is accurate and
consistent according to specific parameters that align with a specific objective.

5. Following a flood and a three-month repair period, Retro Retailer sets a five-year goal to generate a
minimum of $100,000 per quarter in every quarter. What type of goal is this?
A. Profitability
B. Continuous operations
C. Earnings stability
D. Social responsibility
Answer Explanation:
Earnings stability is the goal for a company to generate consistent and stable earnings over a period of time
after a loss. This goal can be pursued instead of a minimum profitability goal. This goal focuses on how to
generate consistent profit in the future, rather than an immediate profit now.
This is part of “risk tolerance,” one of the benefits of ERM. Risk is the uncertainty of outcomes. An
organization must find a balance of how much risk they are willing to accept, this is the tolerable amount of
risk for the organization. This is often referred to as “tolerable uncertainty.”
The amount of risk an organization is willing to accept is the organization’s risk appetite. Determining the
organization’s risk appetite enables managers to better tolerate risk, allowing them to implement new
business decisions without worrying about the uncertainty of risk.
All of the following are components to tolerable uncertainty:
• Continued operations
• Downside risk management
• Emerging risk management
• Measure risk
• Stable earnings

6. Tammy is 60 years old and has $1,200,000 in her retirement portfolio. Her investment in blue-chip
common stocks remains the same, but each year she moves more of her investments out of
aggressive growth mutual funds and into government bond markets and municipalities. Peter had
$250,000 in a savings account with his local bank when news broke about political unrest in a
neighboring country. When Peter saw on the news that global stock markets dropped 15% as a result
of the political unrest, he went to his bank to withdraw all of his money. Who is reacting to subjective
risk concerns?
A. Only Tammy is reacting to subjective risk.

B. Only Peter is reacting to subjective risk.
C. Tammy and Peter are both reacting to subjective risk.
D. Neither Tammy nor Peter are reacting to subjective risk.
Answer Explanation:
Peter is reacting to a subjective risk. Subjective risk is a person’s perception of risk. This is simply an
opinion of how much risk a person thinks they face. This may be different from the actual level of risk.
This is subjective because the person may believe they face more or less than the actual level of risk.
Objective risk is a measurable level of risk. Objective risk is based on facts and data; this is the actual level
of risk faced by a person.

7. Barry is an underwriter for HomeSFE Insurance. He is inspecting a commercial property to determine the
hazard risks presented by the location, and the risk faced by the insurance company. Barry’s biggest
concern is the roof of the property. The roof has a steep slope and looks to be damaged. Which of the
following smart products would be best for Barry to use in this scenario?
A. Drone
B. Computer vision
C. Robotics
D. Sensors
Answer Explanation:
Barry can use a drone to view and the top of the roof of the house for damage and risk.
A drone is the most common form of an unmanned aircraft. A drone is essentially a flying robot that may be
controlled remotely or autonomously with onboard sensors and GPS.
• Drones are used in the insurance industry to gather underwriting and claims information. For example,
insurers use drones to take photos and inspect the quality of a homeowner’s roof.
• Insurers have used drone data to analyze wildfire-prone areas. With this information, data scientists
concluded that well-maintained properties in high-risk wildfire areas are better risks than poorly
maintained properties in moderate-risk wildfire areas.

8. Jessica, CEO of Integrity Pharmaceuticals, introduces new ideas by linking them to familiar
concepts that would be understood by the whole company. Her goal is to help the entire
organization understand her ideas. This is an example of which aspect of effective risk
management communication?
A. Linking familiar ideas

B. Feedback
C. Repeat for clarity
D. Common language
Answer Explanation:
Effective risk management communication has several characteristics.
• Feedback - effective communication asks for feedback.
• Link to familiar ideas - When introducing new ideas, do so by linking them to familiar ideas. Provide references, both to shared
experiences and to written texts, to help the audience understand.
• Repeat for clarity - Key points can and should be repeated, for clarity and emphasis.
• Simple communication - Effective communication is as simple as possible. Effective communication is as brief as possible. (Get to
the point!)
• Understand the audience - Effective communication is audience-specific. It sends clear and accurate messages to specific
audiences.
• Understand the purpose - All communications match their intended purpose: communicating to persuade is different than
communicating to acknowledge, clarify, or inform.
• Use common language - Effective communication uses language that is as clear and common as possible. Effective communication
avoids jargon and uses specialized terms only when necessary.
Beyond these characteristics, which refer to individual communications, effective communication about risk management has two other
systemic qualities.
• Plan for crises - First, organizations with effective communication create a plan for crises, and use the crises that do occur to build
better, more functional relations with stakeholders.
• Fictional communication – Second, for this communication to happen, firms need a functional communication system. That means
periodically reviewing communications plans, processes, and materials. Fix any problems. Find better methods when possible.

9. Ricky, a compliance specialist, is analyzing the state of Florida statutes and regulations to ensure
BYB Company has not violated local laws with their new manufacturing plant operating in Orlando
Florida. What layer in the three lines of defense model is this?
A. First Line of Defense

B. Second Line of Defense
C. Third Line of Defense
D. Fourth Line of Defense
Answer Explanation:
This is the second line of defense.
The Federation of European Risk Management Associations (FERMA) and the European Commission of Institutes of Internal
Audit (ECIIA) invented and adapted the “Three Lines of Defense Model”. This model defines and clarifies roles within an
internal control system. The Three Lines of Defense Model states that to construct effective internal controls, the controls
should be linear and create checks and balances. As the name suggests, there are three layers in the Three Lines of Defense
Model.
• First Line of Defense - In this stage, operational managers evaluate, control, and mitigate risk. They're responsible for
maintaining internal controls.
• Second Line of Defense - In this stage, risk managers and their staff monitor operational managers and support their
activities. Compliance specialists track compliance risks, such as failure to comply with relevant laws and regulations.
Reviewing safety, quality, and supply change issues is also part of the second line of defense.
• Third Line of Defense - In this stage, internal audits reassure the board and senior management of the effectiveness of
risk management efforts.
• Fourth Line of Defense - While not strictly part of the Three Lines of Defense Model, some consider external auditors a
"fourth line of defense." Their analysis of an organization's financial statements gives stakeholders independent
assurance.

10. Which of the following is true regarding BCM?
A. BCM considers both physical property and all other effects that a disaster could have on a
company.
B. BCM only focuses on internal damage to the firm, such as financial crisis after a loss.
C. BCM is always a separate function from the risk management department.
D. BCM manages hazard risk only.
Answer Explanation:
Where traditional risk management focuses on protecting an organization’s physical property, BCM
considers all effects that a disaster could have on a company and the consequences a loss could have on
other locations and departments of the organization. This supplements the effects of traditional risk
management.
A BCM plan addresses four main areas.
• Internal harm to the firm, such as financial crisis after a loss.
• Operational capacity and loss of operation.
• Physical location damage.
• Technology.
BCM can be included within the company’s risk management function, or it can be separated from
traditional risk management roles.

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ARM™ 400 Practice Exam

Presented by: AssociatePI

A. ABX Company purchases commercial property insurance

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A. Most of John’s 401k is invested in a technology-focused

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A. Accuracy, completeness, and validity

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A. Linking familiar ideas

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A. First Line of Defense

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A. BCM considers both physical property and all other effects

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A. Accuracy, completeness, and validity

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A. Only Tammy is reacting to subjective risk.

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A. Linking familiar ideas

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A. First Line of Defense

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Get started studying today!

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