CISI IoI Economic Indicators and Portfolio Theory

Question 1

What does 'GDP' (Gross Domestic Product) measure?

Accepted Answer

The total monetary value of all goods and services produced within a country during a specified period

Answer

The total value of a country's exports minus its imports

Answer

The total savings held by households in a country

Answer

The total debt owed by a government

Question 2

What is 'inflation' and how is it measured in the UK?

Accepted Answer

Inflation is the general rise in prices over time; in the UK it is primarily measured by the Consumer Prices Index (CPI) and Retail Prices Index (RPI)

Answer

Inflation is economic growth; it is measured by GDP

Answer

Inflation is the rate at which wages increase; it is measured by the Average Earnings Index

Answer

Inflation is measured by the FTSE 100 index performance

Question 3

What is a 'recession' in economic terms?

Accepted Answer

Two consecutive quarters of negative GDP growth

Answer

A fall in the stock market of more than 20%

Answer

A period of high inflation combined with low growth

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A rise in unemployment above 10%

Question 4

How does a rise in interest rates typically affect the economy?

Accepted Answer

It reduces consumer spending and business investment by making borrowing more expensive, thereby slowing economic growth and reducing inflation

Answer

It stimulates spending by making borrowing cheaper

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It increases corporate profits by reducing companies' borrowing costs

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It has no effect on economic activity

Question 5

What does the 'yield curve' show?

Accepted Answer

The relationship between bond yields and their time to maturity — typically showing how yields change as the maturity lengthens

Answer

The historical performance of a bond fund over time

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The return generated by the FTSE 100 over different time periods

Answer

The relationship between a company's share price and its dividend yield

Question 6

What is 'modern portfolio theory' (MPT) and who developed it?

Accepted Answer

A theory developed by Harry Markowitz showing how combining assets with different correlations can construct portfolios that optimise return for a given level of risk

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A theory developed by Warren Buffett suggesting investors should focus on individual stock selection

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A theory developed by the Bank of England for managing national debt

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A theory developed by the FCA to govern how investment managers should construct client portfolios