MCQ Risk - Chapter 6

Question 1

The best measure to use for the client’s risk, where the investment is a part of their total diversified equity portfolio, is:

A
Standard deviation

B
Beta

C
The risk-free rate

D
Covariance

Answer 1

The question states that the client has a DIVERSIFIED portfolio. The only risk they are therefore exposed to is SYSTEMATIC risk (measured by Beta).
Note: if the portfolio was not diversified, standard deviation would be the best measure of risk.

Question 2

ndex funds can suffer from:

I Tracking error
I I Index error
I I I Market error

Answer 2

I Tracking error

Question 3

If the value of a fund at the end of the year is £10,500,000 and the rate of return achieved was 8%., what was the value of the fund at the start of the year?

A
£9,230,000

B
£9,660,000

C
£9,722,222

D
£10,420,000

Answer 3

Explanation - Correct Answer: C
Using the present valuing formula:
£10,500,000 / 1.08 = £9,722,222

Question 4

An active fund manager selecting undervalued bonds will choose bonds with a:

A
Negative Alpha

B
Positive Alpha

C
Negative Beta

D
Positive Beta

Answer 4

Explanation - Correct Answer: B
‘Alpha’ is another name for the Jensen measure: i.e. actual return less the CAPM predicted return.
Under-valued bonds will have higher than expected returns. Therefore, if the actual return is higher than the CAPM prediction, the Alpha will be positive.

Question 5

Predictive tracking error is also known as which one of the following terms?

A
Realised

B
Ex-ante

C
Correlation

D
Ex-post

Answer 5

Explanation - Correct Answer: B
‘Realised’ and ‘ex-post’ are terms that relate to historical tracking error. Ex-ante is generally used by portfolio managers to control risks.

Question 6

What is the present value of £1,000 to be received one year from now, assuming an annual interest rate of 9%?

A
£852.32

B
£862.96

C
£917.43

D
£1,090.00

Answer 6

Divide value by IRR. So 1000/1.09 = 917.43. C.

Question 7

A portfolio is made up of two shares, X and Y, with betas of 0.5 and 1.2 respectively. 80% of your money is invested in X, the rest in Y. What is the beta of your portfolio?

A
0.64

B
0.7

C
0.85

D
1.06

Answer 7

Explanation - Correct Answer: A
Weighted average beta = (0.5 x 0.8) + (1.2 x 0.2) = 0.64.

Question 8

WHich of the following is used to measure how closely a portfolio follows its benchmark index?

Alpha
Information Ratio
Standard deviation
Tracking error

Answer 8

Tracking error

Question 9

What type of return does a coupon provide?

Holding period
Nominal
Real
Total

Answer 9

Nominal

Question 10

Which of the following is true of the activity of asset allocation. A firm should:

Consider the propects for the major asset classes globally
Exclude investment regions where there is potential political instability
Pick those asset classes which correlate most closely
Ignore changing social enviroments

Answer 10

Consider the prospects for the major asset classes globally

Question 12

Paul Scholes is a protfolio manager and is considering an investment which, while,not strictly forbidden by his firm, is marginally out of step with company policy. Franks proposed actions would typically benefit from

Risk review with independent risk managers in the firm
Risk review with other fund managers
Peer review with other fund managers
Peer review with independent risk managers in the firm

Answer 12

Peer review with other fund manager