Chapter 5 Flashcards
Quantitative easing is a form of monetary policy that, when used in isolation, will tend to: Select one: a. reduce short term interest rates. b. reduce long term interest rates. c. increase long term interest rates. d. increase short term interest rates.
a. reduce short term interest rates.
SEE CHAPTER 5A3A
A government is MOST likely to stimulate demand in a slowing market by: Select one: a. reducing expenditure. b. increasing interest rates. c. increasing taxation. d. increasing expenditure.
d. increasing expenditure.
SEE CHAPTER 5A2D
A factory was burned down due to being in close proximity to a forest fire. This would be deemed to be: Select one: a. systematic risk. b. operational risk. c. event risk. d. prudential risk.
c. event risk.
SEE CHAPTER 5A7
Ricoh is seeking ‘real asset protection’ from his portfolio. He therefore wants his portfolio to:
Select one:
a. beat the chosen index.
b. beat inflation.
c. generally move in line with inflation.
d. match the chosen index.
c. generally move in line with inflation.
SEE CHAPTER 5A2C
In times of recession, central banks will sometimes use quantitative easing. What is NOT a potential impact of this?
Select one:
a. The price of gilts rises.
b. Inflation will rise.
c. Rates available to savers tend to fall.
d. Long-term interest rates will always fall.
d. Long-term interest rates will always fall.
SEE CHAPTER 5A3/5A3A
The share price of ABC plc has been impacted greatly on the back of rumoured takeover talks. This is an example of: Select one: a. credit risk. b. systematic risk. c. speculation risk. d. non-systematic risk.
d. non-systematic risk.
SEE CHAPTER 5A1
With investment trusts, gearing tends to increase the severity of:
Select one:
a. neither positive nor negative investment returns.
b. negative investment returns only.
c. positive investment returns only.
d. positive and negative investment returns.
d. positive and negative investment returns.
SEE CHAPTER 5C
Inflation is expected to increase over the long-term. Pauline, a basic rate tax payer, will be most affected by her holding of her: Select one: a. gold fund. b. deposit account. c. infrastructure funds. d. residential property.
b. deposit account.
SEE CHAPTER 5A2B
Nadia is retired and most of her income is from the State pension. When looking at inflation and the impact this has on her income, she is MOST likely to be interested in the:
Select one:
a. owner occupiers’ housing costs.
b. consumer prices index including housing costs.
c. consumer prices index.
d. retail prices index.
c. consumer prices index.
SEE CHAPTER 5A2
In times of uncertainty investors will prefer to hold their money in short-term securities. This can cause a[n]:
Select one:
a. reduction in short-term interest rates.
b. reduction in long-term interest rates.
c. increase in long-term interest rates.
d. increase in short-term interest rates.
a. reduction in short-term interest rates.
SEE CHAPTER 5A3A
A company's profits have fallen significantly due to their staff not following procedures. This was mainly due to the poor training provided by management. The risk that the company has suffered from would be best described as: Select one: a. behavioural risk. b. operational risk. c. event risk. d. regulatory risk.
b. operational risk.
SEE CHAPTER 5A9
Martin, a UK investor, is considering an investment into an emerging market via a unit trust. Which of the following risks will he NOT be exposed to? Select one: a. Political. b. Operational. c. Currency. d. Non-systematic risk.
d. Non-systematic risk.
SEE CHAPTER 5A
Mabel is relatively risk averse. Holding 15 to 20 different securities is likely to dramatically reduce her: Select one: a. non-systematic risk. b. market risk. c. default risk. d. systematic risk.
a. non-systematic risk.
SEE CHAPTER 5A1
The inflation-proofing properties of index-linked government securities can only be guaranteed where the stock: Select one: a. has a long term to redemption. b. has a short term to redemption. c. is undated. d. is held to redemption.
d. is held to redemption.
SEE CHAPTER 5A2B
Historically, the best long term protection against inflation has been provided by investment in: Select one: a. fixed interest stocks. b. permanent interest bearing shares. c. real assets. d. bank deposits.
c. real assets.
SEE CHAPTER 5A2B
The uncertainty surrounding a looming UK general election is likely to impact the FTSE in that it demonstrates:
Select one:
a. event risk that may have a systematic effect.
b. political risk that may have a systematic effect.
c. political risk that may have a non-systematic effect.
d. event risk that may have a non-systematic risk.
b. political risk that may have a systematic effect.
SEE CHAPTER 5A1/5A8
The 'emissions scandal' surrounding VW cars was an example of which type of risk? Select one: a. Systematic risk. b. Relative risk. c. Market risk. d. Non-systematic risk.
d. Non-systematic risk.
SEE CHAPTER 5A1
ABC plc, a mid-cap industrial company, is looking to raise funds by issuing corporate bonds. For an investor, the risks these bonds would be subject to are:
Select one:
a. default, downgrade, credit spread and counterparty risks.
b. downgrade and credit spread risks only.
c. default, downgrade and credit spread risks only.
d. default and downgrade risks only.
a. default, downgrade, credit spread and counterparty risks.
SEE CHAPTER 5A4
Stagflation is a combination of: Select one: a. stagnant profits and disinflation. b. stagnant growth and disinflation. c. stagnant growth and inflation. d. stagnant profits and inflation.
c. stagnant growth and inflation.
SEE CHAPTER 5A2F
Raising interest rates is not a usual tool to combat stagflation because:
Select one:
a. this would cause inflation.
b. interest rates would already be higher than expected.
c. interest rates have no effect on inflation.
d. the economy is already fragile and could suffer further.
d. the economy is already fragile and could suffer further.
SEE CHAPTER 5A2F
Which of these investors would USUALLY be the hardest hit by inflation?
Select one:
a. Craig, who owns a number of corporate bonds.
b. Eric, who regularly invests in private equity.
c. Barry, who has built up a portfolio of buy-to-let properties.
d. Wayne, who owns a number of warehouses.
a. Craig, who owns a number of corporate bonds.
SEE CHAPTER 5A2B
In 2008, the risk of ‘credit spread’ was demonstrated by:
Select one:
a. the growing difference in the yields between corporate bonds and gilts.
b. the narrowing difference in the yields between corporate bonds and gilts.
c. the public being less able to obtain cheap finance.
d. the government being less able to obtain cheap finance.
a. the growing difference in the yields between corporate bonds and gilts.
SEE CHAPTER 5A4
Jason holds two bonds; one with a term of 6 years and one with a term of 20 years. If interest rates fall by 1% the value of both bonds will:
Select one:
a. increase, with the long term bond increasing by the largest amount.
b. decrease, with the long term bond decreasing by the largest amount.
c. decrease, with the short term bond decreasing by the largest amount.
d. increase, with the short term bond increasing by the largest amount.
a. increase, with the long term bond increasing by the largest amount.
SEE CHAPTER 5A3
Paul has £20,000 and borrows a further £5,000 to invest in shares priced at £5. He sells all the shares when the price reaches £6.50. What return has he made on his original capital? Select one: a. 30%. b. 42.5%. c. 37.5%. d. 25%.
c. 37.5%.
SEE CHAPTER 5C
Many investors in equities saw dramatic falls in the value of their portfolios following the credit crisis in 2008. This was an example of which type of risk? Select one: a. Event. b. Systematic. c. Non-systematic. d. Investment specific.
b. Systematic.
SEE CHAPTER 5A1
Which of these investors would USUALLY be the hardest hit by inflation?
Select one:
a. Sally, who relies on her UK company shares.
b. Gary, who owns a number of conventional gilts.
c. Peter, who frequently invests in property.
d. Anna, who likes to invest in works of art.
b. Gary, who owns a number of conventional gilts.
SEE CHAPTER 5A2B
An economy experiencing a period of stagflation is unlikely to see an increase in interest rates as:
Select one:
a. business would suffer and more jobs would be lost.
b. the solution would have to be driven by politicians and not central banks.
c. an interest rate cut is more appropriate to avoid deflation.
d. they would already be at an unusually high level.
a. business would suffer and more jobs would be lost.
SEE CHAPTER 5A2F
Which of Alan’s investments is the MOST vulnerable to liquidity risk?
Select one:
a. With-profits endowment policy.
b. Unlisted shares.
c. UK commercial property unit trust.
d. Real estate investment trusts (REITs).
b. Unlisted shares.
SEE CHAPTER 5A6
The least effective method of diversification would be diversifying via: Select one: a. sector. b. asset class. c. geography. d. tax wrapper.
d. tax wrapper.
SEE CHAPTER 5B
What type of property investment is MOST likely to be vulnerable to liquidity risk?
Select one:
a. Shares in a quoted building company.
b. A shop with a flat above it.
c. A real estate investment trust.
d. An insurance bond invested in a property fund.
b. A shop with a flat above it.
SEE CHAPTER 5A6
Which type of risk best describes the likely effect of a series of plane crashes caused by bad weather on the value of shares in airlines? Select one: a. Event. b. Systematic. c. Political. d. Operational.
a. Event.
SEE CHAPTER 5A7
Those investing in corporate bonds may be vulnerable to any of the following risks, EXCEPT: Select one: a. default. b. downgrade. c. liquidity. d. credit spread.
c. liquidity.
SEE CHAPTER 5A4
Barry has £20,000 and borrows a further £10,000 to invest in shares priced at £5. He sells all the shares when the price drops to £4. What loss has he made on his original capital? Select one: a. 30%. b. 33.3%. c. 20%. d. 25%.
a. 30%.
SEE CHAPTER 5C
Geoff has £15,000 and borrows a further £5,000 to invest in shares priced at £2. He sells all the shares when the price reaches £2.40. What percentage return has he made on his original capital? Select one: a. 26.67%. b. 40%. c. 20%. d. 33.33%.
a. 26.67%.
SEE CHAPTER 5C
What would be the PRINCIPAL type of risk presented to a portfolio of North American bonds by a major flood disaster in the USA? Select one: a. Event. b. Operational. c. Political. d. Liquidity.
a. Event.
SEE CHAPTER 5A7
Toyda is a car manufacturer. The event risk associated with its ability to produce cars is linked to the:
Select one:
a. possibility that the company will be downgraded by a credit rating agency.
b. proximity of its main plant to an earthquake zone.
c. situation of its main plant within a politically unstable environment.
d. possibility of a major fault on the production line.
b. proximity of its main plant to an earthquake zone.
SEE CHAPTER 5A7
Bruce was in desperate need for cash and was forced to sell his private equity holding at a price well below its fair value. He has been affected by what type of risk? Select one: a. Operational. b. Event. c. Credit. d. Liquidity.
d. Liquidity.
SEE CHAPTER 5A6
Giles has a portfolio of six individual US corporate bonds. He can reduce his exposure to non-systematic risk by:
Select one:
a. replacing his current holdings with UK corporate bonds.
b. purchasing more US corporate bonds.
c. replacing his current holdings with equity investments in the same six companies.
d. halving his current holdings and replacing them with UK equities.
b. purchasing more US corporate bonds.
SEE CHAPTER 5A1
Alan has money invested in a UK equity unit trust, a life assurance policy, unlisted shares and shares in a FTSE 100 company. The investments that represent the MOST and LEAST risk respectively are the:
Select one:
a. shares in a FTSE 100 company and the UK equity unit trust.
b. UK equity unit trusts and the life assurance policy.
c. unlisted shares and the life assurance policy.
d. shares in a FTSE 100 company and the unlisted shares.
c. unlisted shares and the life assurance policy.
SEE CHAPTER 5B
Stephen is very concerned about default risk, he is therefore MOST likely to be invested in a[n]: Select one: a. UK equity fund. b. property based OEIC. c. emerging markets fund. d. corporate bond fund.
d. corporate bond fund.
SEE CHAPTER 5A4
Paula borrows 20% of the cost of an investment. How much does she lose, in percentage terms, if the value of the investment falls by 15%? Select one: a. 18.75%. b. 17.5%. c. 15%. d. 25%.
a. 18.75%.
SEE CHAPTER 5C
Increasing the number of different shares in an equity portfolio from 14 to 40 is MOST likely to: Select one: a. decrease market risk. b. decrease investment-specific risk. c. increase default risk. d. increase counterparty risk.
b. decrease investment-specific risk.
SEE CHAPTER 5A1
Morag, an investor, invests in the following assets: a buy to let property, a real estate investment trust, a term account with a building society and a UK equity unit trust. Which of these is MOST likely to present a liquidity risk? Select one: a. Buy to let property. b. UK equity unit trust. c. Term account. d. Real estate investment trust.
a. Buy to let property.
SEE CHAPTER 5A6
An example of operational risk is ZYX plc:
Select one:
a. over-valuing assets in their accounts.
b. relying on imported raw materials from France.
c. being downgraded by a credit rating agency.
d. relying on diminishing retail markets for its returns.
a. over-valuing assets in their accounts.
SEE CHAPTER 5A9
High inflation, high unemployment and low economic output all contribute to: Select one: a. currency declines. b. rising interest rates. c. stagflation. d. recoveries.
c. stagflation.
SEE CHAPTER 5A2F
Brian has £5,000 and borrows a further £10,000 to invest in shares priced at £3. He sells all the shares when the price drops to £2.50. What loss has he made on his original capital? Select one: a. 33.3%. b. 16.7%. c. 50%. d. 25%.
c. 50%.
SEE CHAPTER 5C
Credit risk is a PARTICULARLY important consideration for those investing in: Select one: a. bonds. b. property. c. shares. d. cash.
a. bonds.
SEE CHAPTER 5A4
Padraig has a bond which is worth £10,000 and produces an income of 3%. If it has a modified duration of 5, what would typically happen if interest rates rise by 1%?
Select one:
a. The income from the bond will fall to 2.5%.
b. The bond value will rise to £10,500.
c. The income from the bond will rise to 3.5%.
d. The bond value will fall to £9,500.
d. The bond value will fall to £9,500.
SEE CHAPTER 5A3
Reducing the number of different shares in an equity portfolio from fifty to fourteen is MOST likely to: Select one: a. reduce counterparty risk. b. reduce default risk. c. increase non-systematic risk. d. increase market risk.
c. increase non-systematic risk.
SEE CHAPTER 5A1
Matt invests in a portfolio that is predominantly invested in FTSE 100 shares. Ross invests in fixed interest and corporate bonds. What type of risk is substantially higher for Ross than Matt? Select one: a. Currency risk. b. Downgrade risk. c. Liquidity risk. d. Event risk.
b. Downgrade risk.
SEE CHAPTER 5A4
