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Securities > Risk and Reward > Flashcards

Risk and Reward Flashcards

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SIE Exam flashcards
1
Q

Which of the following institutions would be most interested in assets that are highly-liquid and low-risk?

A

Home insurance

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2
Q

An investor wants to hedge a short equity position as she believes that the stock price will rise thereby incurring a loss on her positions. Which of the following is the best strategy to adopt?

A

Long-futures

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3
Q

Which of the following is true about money market funds? They invest in securities that are:

A

Short-term, low-risk

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4
Q

Which of the following would be the preferred investment for a life assurance company to fund its long-term obligations?

A

Equities

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5
Q

Which of the following may be taken into account under the ‘know your customer’ principle when trying to understand a client’s profile and needs in relation to investing?

A

Personal details
Income
Assets and liabilities
Expectations

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6
Q

All other things being equal, which of the following bonds indicates more risk?

A

10yr, 5% coupon gilt

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7
Q

What best achieves diversification?

A

Combining securities which are not highly-correlated

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8
Q

Secondary information providers take information from primary information providers and then disseminate this information mostly to:

A

Brokers and research analysts

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9
Q

An investor holds an asset. In order to hedge, they should:

A

Buy puts

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10
Q

Why would an investor choose a CC-rated bond as opposed to an A-rated bond?

A

The CC-rated bond would give a higher potential return

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11
Q

Money market funds would invest in which of the following?

A

Treasury bills

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12
Q

Which of the following best indicates the risk of a share you own performing poorly in relation to shares of other companies?

A

Unsystematic

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13
Q

Rank the following investments in order of risk, riskiest first:

A

Ordinary shares
Preference shares
Convertible loan stock
Secured debentures

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14
Q

A bank is seeking to hedge a short-term exposure to interest rates using a standardised, liquid, low-cost contract. Which of the following would be best?

A

A short-term interest rate future

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15
Q

A higher-rate taxpayer has been recommended UK government debt. If they have a low-risk preference, which of the following types of gilts would be most appropriate?

A

Low-coupon, short-dated

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16
Q

Which of the following investments are regarded as being very high-risk?

A

Buying or selling futures

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17
Q

Which of the following would a charity find most useful?

A

Gross redemption yield

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18
Q

The value of which of the following investments is likely to be least volatile?

A

Building society deposits

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19
Q

Which of the following statements about systemic risk is LEAST LIKELY to be correct?

A

Econometric methodology can be used to accurately predict the likelihood and impact of systemic risk

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20
Q

Which two of the following investments can provide capital appreciation and income?

A

Property

Equities

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21
Q

Luciano manages an equity portfolio of large UK company shares. He is a little concerned about the short to medium term prospects for the stock market and would like to hedge his position in order to protect the portfolio against any fall. Which of the following instruments could he use to create this hedge?

A

Sell FTSE 100 futures

Buy FTSE 100 put options

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22
Q

What investment entity would be interested in commercial paper?

A

Money market fund

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23
Q

Which of the following investment institutions would most likely invest in low-risk, low-return, short-dated investments?

A

General insurance companies

24
Q

Recent inflation data released in the UK shows a significant increase in prices. Which of the following would you expect to happen to the prices of gilts and other fixed income instruments (including Treasury bills)?

A

Decrease, Decrease

25
Q

Rank the following in ascending order of risk, least risky first:

A

UK Government bonds
FTSE 100 secured corporate bonds
Listed equities
Quoted equities

26
Q

What is the aim of portfolio diversification?

A

To optimise the risk-reward trade-off

27
Q

When would you advise a client to consider equities?

A

During a period of higher inflation, and the client wishes to invest in successful companies.

28
Q

Which of the following statements regarding passive fund management is LEAST LIKELY to be true?

A

They typically under-perform active funds

29
Q

Which term correctly describes the difference in returns of a tracker fund and that of the index which the fund is tracking?

A

Tracking error

30
Q

If a fund manager fully subscribes to the efficient market hypothesis he is likely to adopt which of the following strategies?

A

Passive

31
Q

Which of the following best achieves diversification within a portfolio?

A

Holding stocks that do not have correlated returns

32
Q

Policy switching would be best described as which one of the following?

A

Selling shorter dated, low-duration bonds and buying longer-dated, high-duration bonds in expectation of a cut in interest rates

33
Q

Which one of the following could be considered a subsection of market risk?

A

Interest rate risk

34
Q

Diversification within a portfolio where the risk/reward profile is maximised would be where it contains:

A

Uncorrelated stocks

35
Q

Which of the following is TRUE in respect of passive fund management relative to active fund management?

A

Fewer trades

36
Q

An investor is concerned that there could be another financial crisis and is looking to a ‘flight to safety’ approach using short term UK government T-bills. Which of the following is the correct observation about the period leading up to the crisis?

A

The yields achievable on the T-bills are likely to fall and possibly become negative

37
Q

An investor buys commercial paper direct from an issuing company. Which of the following could be a motivation?

A

To reduce the impact of costs through elimination of broker’s charges

38
Q

A PIP would normally provide information to:

A

SIP

39
Q

Where an issuing company markets short term debt securities directly to a buy and hold investor such as most money market funds, they would be selling which of the following?

A

Direct commercial paper

40
Q

When choosing more investments to add into a portfolio, which type of correlation with existing investments would reduce the risk the greatest?

A

Strongly negatively correlated

41
Q

Which of the following explains the relationship for risk and return for any ‘rational’ investor?

A

A positive relationship

42
Q

What is the process by which pension funds can remove re-investment risk and therefore impose certainty in the return of the fund?

A

Immunisation

43
Q

A rise in inflation would benefit:

A

A borrower

44
Q

Which one of the following could be considered an example of an unsystematic risk?

A

A profit warning from a single company

45
Q

An investor owns a large portfolio of UK equity but now has a very bearish attitude to the markets. What would you recommend to them if they are a very high risk investor?

A

Sell futures and buy puts on the market

46
Q

The risk of a share performing differently from other shares is known as:

A

Unsystematic risk

47
Q

Which one of the following is the best description of anomaly switching?

A

Moving between two bonds similar in all respects apart from the yield and price at which each trades.

48
Q

Which of the following securities is most suitable if you are an investor who wishes to have an increase in returns as the performance of the company improves?

A

Participating preference shares

49
Q

A large fire destroys a company’s warehouse and this, in turn, causes the company’s share price to fall. This is an example of:

A

Unsystematic risk

50
Q

Which one of the following is most likely to levy performance-related fees on the investor?

A

Hedge funds

51
Q

Which of the following would enable an investor to benefit from future growth in the share price of a company?

A

Convertible loan stock

52
Q

Which of the following is the most suitable for a medium-risk investor?

A

Portfolio of diversified equity securities

53
Q

Which of the following are secondary information providers?

A

Thomson Reuters and Bloomberg

54
Q

Which of the following statements about a pension fund is least likely?

A

They have a relatively low risk profile

55
Q

An investor looking for an investment that provides long-term capital growth, regular and predictable income should invest in which of the following?

A

Commercial property

Securities (19 decks)

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