Insurance and Risk Management

211. If the risk-free rate of interest is 5 per cent p.a. while the return on a whole market portfolio is 17 per cent, the rate of return required on a share with an â-coefficient of 1.15 will be:

  1. 13.8%
  2. 19.55%
  3. 18.8%
  4. 24.55%
  5. 15%

Correct answer: (C)
18.8%

212. Imagine a banking system with a reserve ratio of 0.1 and a public's cash ratio is 0.05. According to the base-multiplier approach, an open market purchase of £20m bonds from the general public by the central bank should:

  1. Reduce the money supply by £20m
  2. Reduce the money supply by £140m
  3. Increase the money supply £20m
  4. Increase the money supply by £200m
  5. Increase the money supply by £140m

Correct answer: (E)
Increase the money supply by £140m

213. Imagine that a bank grants new lending facilities to its customers of £200m. Customers borrow £150m which they use to make payments to creditors. The creditors decide to hold those payments as £100m additional bank deposits and £50m notes and coin. The effect on the money supply is:

  1. +£100m
  2. +£200m
  3. +£150m
  4. no change
  5. +£50m

Correct answer: (C)
+£150m

214. In 2008 you are advising someone with £1000 to invest. Their sole investment objective is to earn a rate of return which is absolutely guaranteed over the next four years. Which of the following would you recommend?

  1. Buy corporate bonds maturing in 2010 and then reinvest for two years
  2. Buy government bonds maturing in 2012
  3. Buy company shares now and sell in 2012
  4. Buy perpetual bonds and sell in 2012
  5. Put the money on deposit with a bank for four years

Correct answer: (B)
Buy government bonds maturing in 2012

215. In Italy in recent years there has been:

  1. A loss of competitiveness in the banking system
  2. A reduction in the number of banks
  3. An increase in the number of small, more specialist, banks
  4. An increase in the role of the government in the banking system

Correct answer: (B)
A reduction in the number of banks

216. In June 2008, UK banks held approximately £6bn in notes and coin, £26bn in operational deposits at the Bank of England, £475bn in money market loans and £3,958bn in sterling and foreign currency deposits. Their collective reserve ratio was:

  1. 0.15%
  2. 0.6%
  3. 0.8%
  4. 12.8%
  5. 8%

Correct answer: (C)
0.8%

217. In the course of 1923, German prices rose by approximately:

  1. 20,000 times
  2. 20bn times
  3. 2m times
  4. 2bn times
  5. 200 times

Correct answer: (B)
20bn times

218. In the course of a year a pension fund buys £15m of UK government bonds, £30m of UK company shares, £10m of ordinary company shares. It also sells £5m of overseas government bonds and £9m of UK preference shares. Its net acquisition of assets during the year was:

  1. £30m
  2. £55m
  3. £69m
  4. £14m
  5. £41m

Correct answer: (E)
£41m

219. In the flow of funds analysis of money supply determination an increase in government borrowing not financed by the sale of bonds is likely to lead to:

  1. An increase in notes and coin
  2. Less bank lending to the general public
  3. Higher interest rates
  4. A fall in banks' reserve ratio
  5. An increase in bank deposits

Correct answer: (E)
An increase in bank deposits

220. In the flow of funds approach to money supply determination a rise in the central bank's official dealing rate will most likely:

  1. Reduce the demand for deposits
  2. Lead to a smaller multiplier
  3. Reduce the public's cash ratio
  4. Reduce the demand for bank loans
  5. Increase banks' reserve ratios

Correct answer: (D)
Reduce the demand for bank loans

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