CIMA Applied Finance & Economics 3

Question 1

Which concept explains why a monopolist produces at a lower output and charges a higher price than a perfectly competitive firm in equilibrium?

Accepted Answer

Monopolist equates MR = MC where MR < P

Answer

A monopolist faces a downward-sloping demand curve, so MR < P at every output level, leading to higher prices and lower output than competitive markets.

Question 2

An investor uses a zero-cost collar strategy on a stock position. This strategy involves:

Accepted Answer

Buying a put and selling a call at equal premiums

Answer

A zero-cost collar involves buying a protective put and selling a covered call such that the premiums offset, creating downside protection at no net cost.

Question 3

In the context of fixed income, 'negative convexity' is most commonly associated with:

Accepted Answer

Mortgage-backed securities

Answer

MBS exhibit negative convexity because prepayments accelerate when rates fall, limiting price appreciation—similar to callable bonds.

Question 4

The Fisher Effect states that the nominal interest rate equals approximately:

Accepted Answer

Real interest rate plus expected inflation

Answer

The Fisher Effect: nominal rate ≈ real rate + expected inflation, meaning nominal rates adjust to compensate for anticipated inflation.

Question 5

GDP measured by the expenditure approach equals the sum of:

Accepted Answer

C + I + G + (X – M)

Answer

The expenditure approach sums Consumption, Investment, Government spending, and Net Exports (Exports minus Imports).

(CIMA) Certified Investment Management Analyst Practice Test

(CIMA) Certified Investment Management Analyst Practice Test

CIMA Applied Finance & Economics 3