RMI 2101 Spring 2014
Homework Assignment 3 12 Points

Due on Wednesday, February 19, 2014 AT THE BEGINNING OF CLASS

Be careful to follow the Guidelines for Homework Document located in the Course Documents Section of Blackboard.
Hint: Read the questions carefully and be sure that what you write answers the questions. Many times students give correct information in an answer but that information is not the answer to the question.
1. Refer to the article How Toyota Lost Its Way.
a. From an ERM perspective, identify and briefly discuss two types of ERM risks. [4 points]
1.) Operational risk: An example of operational risk would be how Toyotas reputation for designing high quality cars has been damaged. It was damaged due to the dangers of the defective parts that were manufactured. Poor customer service also applies due to foreign communication issues where feedback would take too long to travel back and forth between countries. The slow response resulted in a $16.4 million dollar fine.
2.) Hazard risk: An example of a Hazard risk would be that Toyota is liable for the health and safety of the customers that got into an accident due to the car’s defective parts that were manufactured. This resulted in a number of lawsuits and fatal injuries.

b. For each risk you identify, indicate if it is a pure or speculative risk. Justify your answer in both cases. [4 points] 1.) The operational risk mentioned would be considered a pure risk because the lack of a quick response to feedback leads to two possibilities. 1. Something bad happening or 2. Nothing happening at all. Unfortunately, they received a fine, lost customers, and damaged their reputation.

2.) The hazard risk mentioned would be considered a pure risk because the risk of getting into an accident due to a defective part is out of the customers hands. The fault lies on the company.
c. For each risk you identify, indicate if this risk is diversifiable or non- diversifiable. Justify your answer in both cases. [4 points]
1.) The operational risk mentioned is diversifiable because there were ways that Toyota could of avoided the losses that incurred by diversifying their portfolio which would of improved the level of risk relative to return. Ex. Faster customer service response, Insuring safer/ more reliable parts.
2.) The hazard risk mentioned is also diversifiable for the same reason. Diversification could of lowered the risk of defective products being put on the market, which would result in reducing the risk of liability when customers get into accidents.