Insurance and Risk Management

261. The rescue of insolvent banks inevitably raises problems of:

  1. Cost
  2. Insurance
  3. Ownership
  4. Moral hazard

Correct answer: (D)
Moral hazard

262. The returns on the following 3-month instruments are quoted in the usual way (i.e. some as discount rates, some as interest yields). Which instrument offers the best rate of return?

  1. 4.58% on a CD
  2. 4.56% on commercial paper
  3. 4.5% on a treasury bill
  4. 4.55% on a repo
  5. 4.6% on an interbank deposit

Correct answer: (B)
4.56% on commercial paper

263. The risk free rate of interest is 5% while the whole market return is 16%. According to the CAPM, the rate of return required on an asset with a β-coefficient of 1.1 is:

  1. 17.1%
  2. 67.1%
  3. 17.6%
  4. 22.6%
  5. 22.1%

Correct answer: (A)
17.1%

264. The risk free rate of interest is 6% while the market risk premium is 10%. A share which is twice as risky as the whole market portfolio should produce a return of:

  1. 26%
  2. 38%
  3. 32%
  4. 22%
  5. 36%

Correct answer: (A)
26%

265. The simple Phillips curve was attacked as suffering from:

  1. Money illusion
  2. Backward-looking expectations
  3. Optimism
  4. Lack of sufficient evidence
  5. Rational expectations

Correct answer: (A)
Money illusion

266. The Swedish banking system is dominated by:

  1. Universal banks
  2. Large banks
  3. Specialist banks
  4. Mortgage banks
  5. Co-operative banks

Correct answer: (A)
Universal banks

267. The target inflation rate in the UK is set by:

  1. The European Central Bank
  2. The government
  3. The European Commission
  4. The Monetary Policy Committee

Correct answer: (B)
The government

268. The yields on government bonds are usually less than yields on corporate bonds of similar maturity because:

  1. Corporate bonds have a shorter maturity than government bonds
  2. Government bonds are less risky than corporate bonds
  3. Corporate bonds have a longer maturity than government bonds
  4. Governments are non-profit-making institutions
  5. Government bonds are riskier than corporate bonds

Correct answer: (B)
Government bonds are less risky than corporate bonds

269. Two assets have variances of 24 (asset A) and 45 (asset B). The covariance between them is 15. If a portfolio is composed of the two assets in the proportions 70% in A and 30% in B the portfolio standard deviation will be:

  1. 4.7
  2. 30.3
  3. 11.6
  4. 22.11
  5. 69

Correct answer: (A)
4.7

270. Two assets have variances of 24 (asset A) and 45 (asset B). The covariance between them is 15. The correlation coefficient of returns is:

  1. 0.33
  2. 0.46
  3. 0.64
  4. 1.29
  5. 0.22

Correct answer: (B)
0.46

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