Chapter 6 (Part 2)

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Chapter 6 (Part 2)

Question 1. Which two of the following investments provide capital appreciation and income?

I. Property
II. Options
III. Equities
IV. Premium Bond *

1 point

I and III

II and III

III and IV

I and II

Question 2. A higher-rate taxpayer has been recommended UK government debt (gilts). If they have a low risk preference, which type of gilt is most appropriate? *

1 point

Low-coupon, short-dated

Medium-coupon, short-dated

Low-coupon, long-dated

Medium-coupon, long-dated

Question 3. Which term correctly describes the difference in returns of a tracker fund and the index it is tracking? *

1 point

Basis risk

Tracking error

Sovereign risk

Standard deviation

Question 4. Which statement about systemic risk is LEAST LIKELY to be correct? *

1 point

It is very difficult to insure against

If realised, it would cause widespread panic and chaos in the capital markets

Its likelihood is linked to the fragility of market liquidity

Econometric methodology can be used to accurately predict the likelihood and impact of systemic risk

Question 5. Rank the following investments in order of risk, riskiest first:

I. Ordinary shares
II. Secured debentures
III. Convertible loan stock
IV. Preference shares *

1 point

I, IV, III, II

I, IV, II, III

I, III, II, IV

II, I, IV, III

Question 6. Money market funds would invest in which of the following? *

1 point

Gilts

Treasury bills

Equities

Warrants

Question 7. A rise in inflation would benefit: *

1 point

A depositor

An exporter

A borrower

Pensioners

Question 8. An investor owns a large portfolio of UK equity but now has a very bearish attitude to the markets. What would you recommend if they are a very high risk investor? *

1 point

Sell the portfolio in its entirety and sit on the cash

Sell futures and buy puts on the market

Buy futures and calls on the market

Sell futures and sell puts on the market

Question 9. An investor wants to hedge a short equity position as she believes the stock price will rise, incurring a loss on her position. Which is the best strategy to adopt? *

1 point

Short-futures

Long-futures

Short-call options

Long-put options

Question 10. The risk that a share you own performing poorly in relation to shares of other companies is what type of risk? *

1 point

Market

Sector

Systemic

Unsystematic

Question 11. Which of the following investment institutions would most likely invest in low-risk, low-return, short-dated investments? *

1 point

Life assurance firms

Unit trust managers

Fund managers managing pension funds

General insurance companies

Question 12. Which of the following securities is most suitable if you are an investor who wishes to have an increase in returns as the performance of the company improves? *

1 point

Debentures

Participating preference shares

Cumulative preference shares

Redeemable preference shares

Question 13. Which one of the following might be a passive investment management style? *

1 point

Contrarian

Optimisation

Bottom up

Top down

Question 14. If a fund manager fully subscribes to the efficient market hypothesis (EMH), he is likely to adopt which of the following strategies? *

1 point

Active

Passive

High-risk

Long-short

Question 15. When choosing more investments to add into a portfolio, which type of correlation with existing investments would reduce the risk the greatest? *

1 point

Strongly negatively correlated

Positively correlated

Uncorrelated

Weak positive correlation

Question 16. Which of the following is the most suitable for a medium-risk investor? *

1 point

UK government bonds

Derivatives

A single company's equity

Portfolio of diversified equity securities

Question 17. Which of the following explains the relationship for risk and return for any rational investor? *

1 point

A positive relationship

Inverse relationship

No relationship

Indirect relationship

Question 18. A bank is seeking to hedge a short-term exposure to interest rates using a standardised, liquid, low-cost contract. Which of the following would be best? *

1 point

A forward rate agreement

An interest rate swap

A short-term interest rate future

An interest rate option

Question 19. Which of the following is TRUE in respect of passive fund management relative to active fund management? *

1 point

Aim to exceed the benchmark

Higher management fees

Greater number of trades

Fewer trades

Question 20. Why would an investor choose a CC-rated bond as opposed to an A-rated bond? *

1 point

The CC-rated bond is more certain to pay out

The A-rated bond is more risky

The CC-rated bond would give a higher potential return

The A-rated bond is classified as a junk bond and is not worth investing in

Question 21. An investor looking for an investment that provides long-term capital growth, regular and predictable income should invest in which of the following? *

1 point

A long-dated bond trading above par

Commercial property

Equities

Warrants

Question 22. Which of the following statements regarding passive fund management is LEAST LIKELY to be true? *

1 point

It is consistent with the idea that markets are efficient

It typically employs index tracking strategies

The funds may be exchange traded

They typically under-perform active funds

Question 23. Where an issuing company markets short term debt securities directly to a buy and hold investor such as most money market funds, they would be selling which of the following? *

1 point

Medium term note

Dealer commercial paper

Treasury Bills

Direct commercial paper

Question 24. When there is an increase in the number of assets in a portfolio, total risk is: *

1 point

Increased in unsystematic risk

Increased in systematic risk

Decreased in unsystematic risk

Decreased in systematic risk

Question 25. Which of the following is/are true of systematic risk?

I. It can be controlled by diversification
II. It is the total risk for a fully diversified portfolio
III. It is the risk particular to a particular investment *

1 point

I and III

II and III

II only

I only

Question 26. When would you advise a client to consider equities? *

1 point

During a period of lower inflation, and the client is cautious and wishes to prioritise on income

During a period of higher inflation, and the client wishes to invest in successful companies

When the client has a short-term investment horizon and a low risk appetite

When the client requires income and growth and a moderate risk tolerance and has a portfolio with an 80/20 balance between equity and bonds

Question 27. As a portfolio becomes increasingly well-diversified, which of the following will be driven towards zero? *

1 point

Total risk

Systematic risk

Unsystematic risk

None of the above

Question 28. Returns to investments are usually calculated as: *

1 point

Change in market price

Change in market price plus income received (and re-invested)

Change in market price plus income received (and re-invested) divided by market price at the start of the period

Change in market price plus income received (and re-invested) divided by market price at the end of the period

Question 29. An investment is set up to meet a future liability. The risk that the income from the bonds is invested at an interest rate lower than the interest rate at the start of the fund is called: *

1 point

Market risk

Re-investment rate risk

Interest rate risk

Duration

Question 30. On what basis are companies selected for inclusion in the FTSE 100? *

1 point

Turnover

Net profits

Number of shares in issue

Market capitalisation

Question 31. The death of a company's CEO would represent which one of the following risks? *

1 point

Systemic

Systematic

Unsystemic

Unsystematic

Question 32. Buying which of the following will NOT achieve diversification? *

1 point

A warrant

An actively managed fund

An index-tracking fund

An exchange-traded fund

Question 33. What can be associated with a security that has a Beta of less than one? *

1 point

Generally yields lower returns than a security with a Beta of more than one

Generally yields higher returns than a security with a Beta of more than one

Systematic risk is greater if the Beta is less than one

The unsystematic risk is the same in both securities

Question 34. The standard deviation of a well-diversified portfolio is equal to: *

1 point

Market Beta

The standard deviation of the equivalent market portfolio

The total portfolio Beta

The specific risk of the individual securities invested in the fund

Question 35. An investor has placed their money into an infrequent actively managed account. Which of the following is most likely? *

1 point

In the long run the investor could see enhanced returns to the benchmark

The manager will be using strategies like optimisation to enhance returns

The beta will allow the investor to determine the performance of the manager

They would be subject to much higher charges than a passive fund

Question 36. Additional return when taking additional risk is called: *

1 point

Return premium

Risk premium

Profit premium

Investment premium

Question 37. In the Modern Portfolio Theory, unsystematic risk is: *

1 point

Associated with one stock and cannot be diversified away

Associated with one stock and can be diversified away

Associated with one sector and cannot be diversified away

Associated with one sector and can be diversified away

Question 38. A stock has a beta of 1.2 and is being traded in a market that is expected to grow by 5%. What is the stock's CAPM considering that Treasury Bills have a return of 2%? *

1 point

5.6%

10.4%

-1.6%

-6.4%

Question 39. The current risk free-rate is 4% and the market risk premium is 12%. What is the expected return from a security with a Beta of 1.2? *

1 point

14.9%

14%

18.4%

17.1%

Question 40. When an investor believes that something will not occur in the future because it has already occurred many times in the past, this is called: *

1 point

Herding

Overconfidence

Representativeness

Gambler's fallacy

Question 41. GARP is an example of: *

1 point

Passive management

Bottom-Up active management

Top-Bottom active management

None of the above

Question 42. Which of the following statements is FALSE?

I. Growth investing seeks growth in regular payments
II. Value investing seeks to invest contrary to the market III. Income investing seeks increase in investment value IV. Absolute return investing uses short selling techniques *

1 point

II & IV only

I & III only

I, II & III only

II, III & IV only

Question 43. When an investor believes that the price of a stock will revert to its mean, this is called: *

1 point

Growth Investing

Value Investing

Contrarian Investing

Quantitative Investing

Question 44. When a firm implements an agreed policy for all its investment managers to follow, this is referred to as: *

1 point

Unified approach

Centralised approach

Equalised approach

Formalised approach

Question 45. Four bond portfolios each hold a variety of bonds. Which one of them is BEST described as operating a ladder strategy? *

1 point

Portfolio A, which consists solely of bills maturing in one year plus bonds maturing in 25 and 30 years

Portfolio B, which consists of bills maturing in six months plus bonds maturing in 2, 5, 10 and 20 years

Portfolio C, which consists solely of bonds maturing in 1 and 5 years

Portfolio D, which consists solely of bonds maturing in 20, 25 and 30 years

Question 46. When an investor invests in a zero-coupon bond to cover a future liability in 3 years, what form of immunization is this referred to? *

1 point

Duration-based immunisation

Cash-matching immunisation

ZCB immunisation

Redemption immunisation

Question 47. Morningstar evaluates funds based on five pillars: *

1 point

Process, Performance, People, Parent, Price

Process, Performance, People, Product, Parent

Process, Performance, People, Product, Price

Product, Performance, People, Parent, Price

Question 48. Which of the following removes the impact of cash flows in and out of a portfolio when measuring performance? *

1 point

Total return

Time-weighted rate of return

Holding period return

Money-weighted rate of return

Question 49. A portfolio with a variance of 9% and beta of 1.2 made a total return of 7%. What is the portfolio's Sharpe ratio considering that Treasury Bills gave a return of 2% during the same period? *

1 point

1.67

Question 50. When there is an increase in the number of assets in a portfolio, total risk is: *

1 point

Increased in unsystematic risk

Increased in systematic risk

Decreased in unsystematic risk

Decreased in systematic risk

Question 51. Abnormal return for a portfolio is calculated as: *

1 point

Actual return less market expected return

Actual return less risk-free return

Actual return less portfolio expected return

Actual return less market risk premium

Question 52. What can be associated with a security that has a Beta of less than one? *

1 point

Generally yields lower returns than a security with a Beta of more than one

Generally yields higher returns than a security with a Beta of more than one

Systematic risk is greater if the Beta is less than one

The unsystematic risk is the same in both securities

Question 53. The measure of risk in the Capital Asset Pricing Model is: *

1 point

Standard Deviation

Risk Premium

Beta

Risk-free return

Question 54. Within Prospect Theory, a higher risk-aversion to invest own pension than to invest an occupational pension is known as? *

1 point

Loss aversion

Regret aversion

Mental accounting

Information and noise traders

Question 55. Portfolio performance is: *

1 point

Rarely measured in absolute terms, mostly measured in relative terms

Rarely measured in relative terms, mostly measured in absolute terms

Only ever measured in relative terms

Only ever measured in absolute terms

Question 56. Given the following information about a portfolio, which sector provided the best contribution from stock selection?

Sector | Portfolio Weight % | Sector Return % | Portfolio Return %
Consumer | 23 | 10 | 10.3
Industrials | 19 | 15 | 15.2
Services | 15 | 12 | 12.3
Utilities | 12 | 7 | 7.6 *

1 point

Industrials

Services

Consumer

Utilities

Question 57. An investor allowed the principle of 'regret aversion' to influence his actions. This resulted in him: *

1 point

Declining to buy a stock based purely on a previous bad experience

Buying a badly performing stock from a friend as recompense for recommending it in the first place

Holding a poorly performing stock for an irrationally long period

Only selling stock once a specified loss threshold had been reached

Question 58. Bond portfolio X exclusively contains relatively long-dated stock whereas Bond portfolio Y operates a laddering strategy. This means that Bond X is likely to: *

1 point

Generate higher yields

Present less of a credit risk

Be more sensitive to interest rate changes

Represent a more diversified approach

Question 59. An investment manager believes that markets are inefficient and that he can obtain abnormal returns after transaction charges. Which investment style is he most likely to adopt? *

1 point

Passive

Indexation

Active

Satellite

Question 60. Which of the following is a feature in Arbitrage Pricing Theory (APT)? *

1 point

APT relies on identified factors being correlated

The variables of APT include real economic factors

The principal component of APT is the return on an index of all shares

APT is equivalent to a single factor Capital Asset Pricing Model

Question 61. Fund ABC was valued at $10.5 million at the start of the year and $11.8 million at the end of the year. The asset allocation was 60% equities and 40% bonds. If the fund's benchmark assumes 50/50 allocation and, over this period, equities achieved +7% and bonds achieved +5%, then the fund will have: *

1 point

Underperformed the benchmark by $649,000

Underperformed the benchmark by $670,000

Outperformed the benchmark by $649,000

Outperformed the benchmark by $670,000

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