Insurance and Risk Management

181. An asset began the year with a price of £2.50. It paid income of 30p and finished the year at a price of £2.75. Over the year its rate of return was:

  1. 20%
  2. 10%
  3. 12%
  4. 55p
  5. 22%

Correct answer: (E)
22%

182. An increase in (i) the price level and (ii) the rate of inflation:

  1. Cause the demand for money (i) to fall; (ii) to rise
  2. Both cause the demand for money to rise
  3. Both cause the demand for money to fall
  4. Cause the demand for money (i) to rise; (ii) to fall

Correct answer: (D)
Cause the demand for money (i) to rise; (ii) to fall

183. As the level of interest rates in the economy falls, the demand for money, ceteris paribus:

  1. Will remain unchanged
  2. Could move in either direction depending on other factors
  3. Increase
  4. Will fall more or less in line with the change in interest rates

Correct answer: (C)
Increase

184. Asset A has a variance of 25 while asset B has a variance of 9. The covariance of returns is -15. The proportion of a two asset portfolio that would have to be invested in A in order to create a perfectly riskless portfolio is:

  1. 0.375
  2. 0.675
  3. 0.3
  4. 0.5
  5. 0.6

Correct answer: (A)
0.375

185. Assume that a central bank is willing to buy 14 day repos for $1m, with a repurchase price of $1,002,000. What rate of interest is the central bank charging?

  1. 0.2%
  2. 5.21%
  3. 2.0%
  4. 0.521%
  5. 52.1%

Correct answer: (B)
5.21%

186. Assume that the central bank's main responsibility is to minimise the rate of inflation. A release of economic data suggests that inflationary pressure is increasing. In the circumstances the yield curve is likely to:

  1. Become steeper
  2. Remain unchanged
  3. Increase its downward slope
  4. Slope downward
  5. Become flat

Correct answer: (A)
Become steeper

187. Bank deposit insurance was set up:

  1. To improve the operation of US monetary policy
  2. To deter people from taking risks in derivatives markets
  3. Following the Savings and Loan collapses of the 1980s
  4. Following the bank collapses of the 1930s

Correct answer: (D)
Following the bank collapses of the 1930s

188. Because their flows of funds are largely contractual, life assurance companies can hold:

  1. Fewer liquid assets than pension funds
  2. More overseas shares than investment trusts
  3. More government bonds than banks
  4. More company shares than unit trusts
  5. A lower liquid assets ratio than deposit-taking institutions

Correct answer: (E)
A lower liquid assets ratio than deposit-taking institutions

189. By taking out insurance cover an individual:

  1. Converts the possibility of large loss to certainty of a small one
  2. Reduces the certainty of major loss
  3. Transfers the risk to someone else
  4. Reduces the cost of an accident
  5. Reduces the risk of an accident

Correct answer: (A)
Converts the possibility of large loss to certainty of a small one

190. Corporate bonds have higher yields than government bonds because:

  1. Corporate bonds have higher risk
  2. There is a smaller market
  3. Government bonds are inflation-proof
  4. Firms can afford higher interest payments
  5. They have longer maturities

Correct answer: (A)
Corporate bonds have higher risk

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