Learning Outcome 5 - 5 standard questions / Analyse and explain the nature and impact of the main types of risk on investment performance

Question 1

Which inflationary measure is used to increase benefits and the state pension?

Answer 1

CPI

Question 2

What is stagflation?

Answer 2

Combination of stagnant growth and inflation

Question 3

What investments might an investor consider including in their portfolio to give some protection against inflation?

Answer 3

Fixed-interest securities

Real assets such as shares and property

Commodities

Question 4

What happens to the capital value of fixed-interest securities when interest rates rise?

Answer 4

They fall

Question 5

How can a fund manager reduce interest rate risk in a portfolio?

Answer 5

They can shorten the duration

Question 6

How are interest rates affected by strong economic activity?

Answer 6

They’ll rise

Question 7

What happens to the yield curve if inflation is expected to increase?

Answer 7

It steepens

Question 8

What is a bail-in?

Answer 8

When financial assistance comes from the existing capital base such as the shareholders, bondholders and depositors

Question 9

Credit spread risk is also known as…

Answer 9

Flight to quality

Question 10

What is flight to quality?

Answer 10

Corporate bonds under perform against government bonds due to widening credit spread where investors become nervous

Question 11

What is shortfall risk?

Answer 11

The possibility that you may not reach the investment target that you initially set out to