Insurance and Risk Management

191. Diversification is one way in which insurance companies can protect themselves against:

  1. The law of large numbers
  2. Random fluctuation
  3. Positively correlated risks
  4. Parameter change
  5. Moral hazard

Correct answer: (B)
Random fluctuation

192. Five assets have expected mean returns and variances as follows: (A) 8% 15; (B) 12% 18; (C) 11% 18; (D) 15% 20; (E) 11% 17. Which of these assets will be rejected by all rational risk-averse investors?

  1. B
  2. D
  3. A
  4. E
  5. C

Correct answer: (E)
C

193. Given a current rate of inflation of 3 per cent, and an expected rate of inflation next year of 5 per cent, what increase in nominal wages will workers seek in order to increase their real wage by 2 per cent:

  1. 7 per cent
  2. 4 per cent
  3. 5 per cent
  4. 6 per cent
  5. 3 per cent

Correct answer: (A)
7 per cent

194. Given a fall in interest rates, the largest price change will occur in:

  1. Treasury bills with three months to maturity
  2. Six month time deposits
  3. Perpetual bonds
  4. Bonds with 20 years to maturity
  5. Bonds with five years to maturity

Correct answer: (C)
Perpetual bonds

195. Government appointed members of the Monetary Policy Committee of the Bank of England are appointed:

  1. For set periods up to five years
  2. For one year at a time
  3. For unspecified periods
  4. Frequently
  5. For unspecified periods with a maximum of five years
  6. For 14 years

Correct answer: (A)
For set periods up to five years

196. If a firm has one million shares in issue, earns profits of £200,000 and operates a retention ratio of 0.4, the dividend per share will be:

  1. 12p
  2. 10p
  3. 8p
  4. 4p
  5. 20p

Correct answer: (A)
12p

197. If asset A has a variance of 49 while asset B has a variance of 36 while the correlation coefficient of their returns is 0.75, the covariance of the returns of the two assets is:

  1. 63.75
  2. 13.75
  3. 9.75
  4. 31.5
  5. 1323

Correct answer: (D)
31.5

198. If interest rates rise, the present value of any future earnings is bound to:

  1. Increase in risk
  2. Fall
  3. Suffer from inflation
  4. Become more certain
  5. Rise

Correct answer: (B)
Fall

199. If investors become income risk averse, they will:

  1. Hold long-dated assets to redemption
  2. Buy equities
  3. Sell long-dated assets
  4. Buy short-dated bonds
  5. Hold cash

Correct answer: (A)
Hold long-dated assets to redemption

200. If long-term interest rates rise from 5 per cent to 6 per cent, the price of a perpetual UK government bond with a 7 per cent coupon will change by:

  1. +23.33
  2. +14
  3. 140
  4. -14
  5. -23.33

Correct answer: (E)
-23.33

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