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Applied Finance & Economics Flashcards

7 cards from real CIMA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Applied Finance & Economics flashcards as text

  1. Which type of unemployment is associated with workers transitioning between jobs or entering the labor market for the first time?

    Answer: Frictional unemployment

    Frictional unemployment occurs naturally as workers search for new jobs or enter the workforce, and is considered a normal part of a healthy labor market.

  2. A portfolio has an expected return of 12% and a standard deviation of 18%. If the risk-free rate is 3%, what is the portfolio's Sharpe ratio?

    Answer: 0.50

    Sharpe ratio = (12% – 3%) / 18% = 9% / 18% = 0.50.

  3. In a discounted cash flow (DCF) analysis, increasing the terminal growth rate assumption will:

    Answer: Increase the terminal value

    Using the Gordon Growth Model for terminal value, TV = FCF / (WACC – g), a higher g reduces the denominator and raises the terminal value.

  4. Which of the following best describes the concept of purchasing power parity (PPP)?

    Answer: Exchange rates adjust so that identical goods cost the same across countries

    PPP states that exchange rates should adjust over time to equalize the price of an identical basket of goods across countries.

  5. An increase in the money supply by the Federal Reserve using open market operations involves:

    Answer: Buying government securities from banks

    When the Fed buys government securities from banks, it credits bank reserves, expanding the money supply through the money multiplier.

  6. Which of the following scenarios would most likely cause stagflation?

    Answer: A large, persistent negative supply shock such as a spike in oil prices

    Stagflation—simultaneous high inflation and high unemployment—is typically caused by adverse supply shocks that raise costs and reduce output.

  7. For a European put option, which of the following conditions makes early exercise most valuable (hypothetically, if it were American)?

    Answer: When the option is deep in-the-money and interest rates are high

    Early exercise of an American put is most valuable when the put is deep in-the-money and interest rates are high, since holding cash from immediate exercise can be reinvested.