Chapter 6 Flashcards
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.
b. Event.
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.
c. increase, with the long term bond increasing by the largest amount.
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.
c. Systematic.
chapter reference 6A1
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.
d. Craig, who owns a number of corporate bonds.
chapter reference 6A2B
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.
c. Unlisted shares.
chapter reference 6A6
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.
c. A shop with a flat above it.
chapter reference 6A6
The LEAST effective method of diversification would be diversifying via:
Select one:
a. sector.
b. tax wrapper.
c. asset class.
d. geography.
b. tax wrapper.
chapter reference 6B
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.
d. business would suffer and more jobs would be lost.
chapter reference 6A2F
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.
b. spread risk.
chapter reference 6A4
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.
d. Event.
chapter reference 6A7
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%.
d. 30%.
chapter reference 6C
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%.
d. 26.67%.
chapter reference 6C
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%.
c. 37.5%.
chapter reference 6C
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.
b. Gary, who owns a number of conventional gilts.
chapter reference 6A2B
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.
d. growing difference in the yields between corporate bonds and gilts.
chapter reference 6A4
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.
c. Long-term interest rates will always fall.
chapter reference 6A3/6A3A
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.
a. event risk.
chapter reference 6A7
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.
b. political risk that may have a systematic effect.
chapter reference 6A8
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.
a. Cash deposits.
chapter reference 6A2B
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.
d. deposit account.
chapter reference 6A2B
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.
d. reduce short term interest rates.
chapter reference 6A3A
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.
b. operational risk.
chapter reference 6A9
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.
c. non-systematic risk.
chapter reference 6A1
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.
d. positive and negative investment returns.
chapter reference 6C
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.
d. systematic risk.
chapter reference 6A1
Credit risk is a particularly important consideration for those investing in:
Select one:
a. bonds.
b. shares.
c. cash.
d. property.
a. bonds.
chapter reference 6A4
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.
c. Trust A is likely to be more volatile.
chapter reference 6C
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.
d. Buy-to-let property.
chapter reference 6A6
High inflation, high unemployment and low economic output all contribute to:
Select one:
a. stagflation.
b. rising interest rates.
c. recoveries.
d. currency declines.
a. stagflation.
chapter reference 6A2F
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.
a. over-valuing assets in their accounts.
chapter reference 6A9
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%.
a. The bond value will fall to £9,500.
chapter reference 6A3
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.
d. purchasing more US corporate bonds.
chapter reference 6B
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.
a. Unlisted shares.
chapter reference 6B
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.
c. proximity of its main plant to an earthquake zone.
chapter reference 6A7
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%.
c. 50%.
chapter reference 6C
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.
c. decrease investment-specific risk.
chapter reference 6B
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.
a. corporate bond fund.
chapter reference 6A4
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.
c. increase non-systematic risk.
chapter reference 6B
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.
c. Downgrade risk.
chapter reference 6A4
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.
b. Liquidity.
chapter reference 6A6
