Chapter 5 - self test Q's

Question 1

Which investor should be most concerned about inflation risk?
A. Sam, who invests in equities.
B. Jamie, who invests in property.
C. Helen, who invests in cash deposits and fixed-interest securities.
D. Katherine, who invests in multi-asset collective investment schemes.

Answer 1

C

• Equities and property are real asset investments, and offer the best chance of foiling inflation.
• Multi-asset Collective investment schemes will hold some shares and also expose the investor to real assets.
• Cash and fixed-interest securities therefore have the biggest exposure to inflation risk, of the options given.

Question 2

Alan has a UK Growth Unit Trust, which holds equities in 100 different FTSE companies. When comparing this against direct investment, it is most likely he would be able to…

A. remove systematic risk.
B. reduce systematic risk.
C. remove unsystematic risk.
D. reduce unsystematic risk.

Answer 2

D

Systematic risk can never be removed, but diversifying as such can reduce unsystematic risk.

Question 3

The measure of the sensitivity of a bond to a move in interest rates is known as its…
A. diversification.
B. digression.
C. depreciation.
D. duration.

Answer 3

D

Question 4

Which of the following is the biggest disadvantage of gearing?
A. Increased exposure to equities.
B. Higher levels of risk.
C. Decreased leverage.
D. Reduction on equity content.

Answer 4

B

Question 5

Which of the following types of investment would be considered to carry the highest level of risk?
A. Equities.
B. High yield corporate bonds.
C. Property funds.
D. Derivatives.

Answer 5

D

Derivatives can add significant growth potential, but they also add significant risks.