Chapter 6

Question 1

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. Operational.
b. Event.
c. Political.
d. Systematic.

Answer 1

b. Event.

Question 2

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. decrease, with the long term bond decreasing by the largest amount.
b. decrease, with the short term bond decreasing by the largest amount.
c. increase, with the long term bond increasing by the largest amount.
d. increase, with the short term bond increasing by the largest amount.

Answer 2

c. increase, with the long term bond increasing by the largest amount.

Question 3

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. Non-systematic.
b. Event.
c. Systematic.
d. Investment specific.

Answer 3

c. Systematic.

chapter reference 6A1

Question 4

Which of these investors would usually be the hardest hit by inflation?

Select one:

a. Wayne, who owns a number of warehouses.
b. Barry, who has built up a portfolio of buy-to-let properties.
c. Eric, who regularly invests in private equity.
d. Craig, who owns a number of corporate bonds.

Answer 4

d. Craig, who owns a number of corporate bonds.

chapter reference 6A2B

Question 5

Which of Alan’s investments is the most vulnerable to liquidity risk?

Select one:

a. With-profits endowment policy.
b. Real estate investment trusts [REITs].
c. Unlisted shares.
d. UK commercial property unit trust.

Answer 5

c. Unlisted shares.

chapter reference 6A6

Question 6

What type of property investment is most likely to be vulnerable to liquidity risk?

Select one:

a. An insurance bond invested in a property fund.
b. A real estate investment trust.
c. A shop with a flat above it.
d. Shares in a quoted building company.

Answer 6

c. A shop with a flat above it.

chapter reference 6A6

Question 7

The LEAST effective method of diversification would be diversifying via:

Select one:

a. sector.
b. tax wrapper.
c. asset class.
d. geography.

Answer 7

b. tax wrapper.

chapter reference 6B

Question 8

An economy experiencing a period of stagflation is unlikely to see an increase in interest rates as:

Select one:

a. the solution would have to be driven by politicians and not central banks.
b. an interest rate cut is more appropriate to avoid deflation.
c. they would already be at an unusually high level.
d. business would suffer and more jobs would be lost.

Answer 8

d. business would suffer and more jobs would be lost.

chapter reference 6A2F

Question 9

When there is market uncertainty, corporate bonds may underperform bonds issued by governments. This ‘flight to quality’ is known as credit:

Select one:

a. counterparty risk.
b. spread risk.
c. downgrade risk.
d. event risk.

Answer 9

b. spread risk.

chapter reference 6A4

Question 10

What would be the principal type of risk presented to a portfolio of North American bonds by a major oil spill disaster in the USA?

Select one:

a. Operational.
b. Political.
c. Liquidity.
d. Event.

Answer 10

d. Event.

chapter reference 6A7

Question 11

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. 33.3%.
b. 25%.
c. 20%.
d. 30%.

Answer 11

d. 30%.

chapter reference 6C

Question 12

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. 40%.
b. 20%.
c. 33.33%.
d. 26.67%.

Answer 12

d. 26.67%.

chapter reference 6C

Question 13

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. 42.5%.
b. 25%.
c. 37.5%.
d. 30%.

Answer 13

c. 37.5%.

chapter reference 6C

Question 14

Which of these investors would usually be the hardest hit by inflation?

Select one:

a. Peter, who frequently invests in property.
b. Gary, who owns a number of conventional gilts.
c. Sally, who relies on her UK company shares.
d. Anna, who likes to invest in works of art.

Answer 14

b. Gary, who owns a number of conventional gilts.

chapter reference 6A2B

Question 15

In 2008, the risk of ‘credit spread’ was demonstrated by the:

Select one:

a. public being less able to obtain cheap finance.
b. narrowing difference in the yields between corporate bonds and gilts.
c. government being less able to obtain cheap finance.
d. growing difference in the yields between corporate bonds and gilts.

Answer 15

d. growing difference in the yields between corporate bonds and gilts.

chapter reference 6A4

Question 16

In times of recession, central banks will sometimes use quantitative easing. What is NOT a potential impact of this?

Select one:

a. Inflation will rise.
b. Rates available to savers tend to fall.
c. Long-term interest rates will always fall.
d. The price of gilts rises.

Answer 16

c. Long-term interest rates will always fall.

chapter reference 6A3/6A3A

Question 17

A factory was burned down due to being in close proximity to a forest fire. This would be deemed to be:

Select one:

a. event risk.
b. operational risk.
c. prudential risk.
d. systematic risk.

Answer 17

a. event risk.

chapter reference 6A7

Question 18

The uncertainty surrounding a looming UK general election is likely to impact the FTSE in that it demonstrates:

Select one:

a. political risk that may have a non-systematic effect.
b. political risk that may have a systematic effect.
c. event risk that may have a systematic effect.
d. event risk that may have a non-systematic risk.

Answer 18

b. political risk that may have a systematic effect.

chapter reference 6A8

Question 19

What type of asset class will typically be most adversely affected by increases in inflation?

Select one:

a. Cash deposits.
b. Index-linked gilts.
c. Property.
d. Equity.

Answer 19

a. Cash deposits.

chapter reference 6A2B

Question 20

Inflation is expected to increase over the long-term. Pauline, a basic-rate taxpayer, will be most affected by her holding of her:

Select one:

a. infrastructure funds.
b. gold fund.
c. residential property.
d. deposit account.

Answer 20

d. deposit account.

chapter reference 6A2B

Question 21

Quantitative easing is a form of monetary policy that, when used in isolation, will tend to:

Select one:

a. increase short term interest rates.
b. increase long term interest rates.
c. reduce long term interest rates.
d. reduce short term interest rates.

Answer 21

d. reduce short term interest rates.

chapter reference 6A3A

Question 22

A company’s profits have fallen significantly because its staff have not been 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. event risk.
b. operational risk.
c. behavioural risk.
d. regulatory risk.

Answer 22

b. operational risk.

chapter reference 6A9

Question 23

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. systematic risk.
b. speculation risk.
c. non-systematic risk.
d. credit risk.

Answer 23

c. non-systematic risk.

chapter reference 6A1

Question 24

With investment trusts, gearing tends to increase the severity of:

Select one:

a. neither positive nor negative investment returns.
b. positive investment returns only.
c. negative investment returns only.
d. positive and negative investment returns.

Answer 24

d. positive and negative investment returns.

chapter reference 6C

Question 25

Shares in PDQ plc have dropped by 8% in the same week that the whole stock market has also fallen by 8%. This is most likely to reflect:

Select one:

a. credit risk.
b. non-systematic risk.
c. investment specific risk.
d. systematic risk.

Answer 25

d. systematic risk.

chapter reference 6A1

Question 26

Credit risk is a particularly important consideration for those investing in:

Select one:

a. bonds.
b. shares.
c. cash.
d. property.

Answer 26

a. bonds.

chapter reference 6A4

Question 27

When looking at two investment trusts, Trust A has gearing of 20% and Trust B has gearing of 10%. An investor should be aware that:

Select one:

a. Trust A will appeal to a more risk-tolerant investor.
b. Both should increase in value equally in a rising market.
c. Trust A is likely to be more volatile.
d. Trust B is likely to have more exposure to equities.

Answer 27

c. Trust A is likely to be more volatile.

chapter reference 6C

Question 28

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. Real estate investment trust.
b. Term account.
c. UK equity unit trust.
d. Buy-to-let property.

Answer 28

d. Buy-to-let property.

chapter reference 6A6

Question 29

High inflation, high unemployment and low economic output all contribute to:

Select one:

a. stagflation.
b. rising interest rates.
c. recoveries.
d. currency declines.

Answer 29

a. stagflation.

chapter reference 6A2F

Question 30

An example of operational risk is a company:

Select one:

a. over-valuing assets in their accounts.
b. being downgraded by a credit rating agency.
c. relying on diminishing retail markets for its returns.
d. relying on imported raw materials from France.

Answer 30

a. over-valuing assets in their accounts.

chapter reference 6A9

Question 31

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 bond value will fall to £9,500.
b. The bond value will rise to £10,500.
c. The income from the bond will fall to 2.5%.
d. The income from the bond will rise to 3.5%.

Answer 31

a. The bond value will fall to £9,500.

chapter reference 6A3

Question 32

Giles has a portfolio of six individual US corporate bonds. He can reduce his exposure to non-systematic risk by:

Select one:

a. halving his current holdings and replacing them with UK equities.
b. replacing his current holdings with equity investments in the same six companies.
c. replacing his current holdings with UK corporate bonds.
d. purchasing more US corporate bonds.

Answer 32

d. purchasing more US corporate bonds.

chapter reference 6B

Question 33

Alan has money invested in a UK equity unit trust, a life assurance policy, unlisted shares and shares in a FTSE 100 company. Which type of investment represents the greatest risk?

Select one:

a. Unlisted shares.
b. Shares in a FTSE 100 company.
c. Life assurance policy.
d. UK equity unit trust.

Answer 33

a. Unlisted shares.

chapter reference 6B

Question 34

Toyda is a car manufacturer. The event risk associated with its ability to produce cars is linked to the:

Select one:

a. possibility of a major fault on the production line.
b. situation of its main plant within a politically unstable environment.
c. proximity of its main plant to an earthquake zone.
d. possibility that the company will be downgraded by a credit rating agency.

Answer 34

c. proximity of its main plant to an earthquake zone.

chapter reference 6A7

Question 35

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. 25%.
c. 50%.
d. 16.7%.

Answer 35

c. 50%.

chapter reference 6C

Question 36

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. increase default risk.
c. decrease investment-specific risk.
d. increase counterparty risk.

Answer 36

c. decrease investment-specific risk.

chapter reference 6B

Question 37

If an investor is very concerned about default risk, they are most likely to be invested in a[n]:

Select one:

a. corporate bond fund.
b. property based OEIC.
c. UK equity fund.
d. emerging markets fund.

Answer 37

a. corporate bond fund.

chapter reference 6A4

Question 38

Reducing the number of different shares in an equity portfolio from fifty to fourteen is most likely to:

Select one:

a. increase market risk.
b. reduce counterparty risk.
c. increase non-systematic risk.
d. reduce default risk.

Answer 38

c. increase non-systematic risk.

chapter reference 6B

Question 39

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. Liquidity risk.
b. Event risk.
c. Downgrade risk.
d. Currency risk.

Answer 39

c. Downgrade risk.

chapter reference 6A4

Question 40

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. Liquidity.
c. Credit.
d. Event.

Answer 40

b. Liquidity.

chapter reference 6A6