Risk Management Flashcards
7 cards from real IFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Management flashcards as text
Systematic risk in an investment portfolio refers to:
Answer: Risk affecting the entire market that cannot be diversified away
Systematic (market) risk stems from economy-wide factors like recessions or interest rate changes and affects all securities; it cannot be eliminated through diversification.
A fund's beta of 1.5 indicates that the fund is expected to:
Answer: Move 1.5 times the market's movement in the same direction
A beta of 1.5 means the fund is expected to rise or fall 1.5% for every 1% move in the market, indicating higher volatility than the benchmark.
Which of the following best describes unsystematic risk?
Answer: Company-specific risk that can be reduced through diversification
Unsystematic (idiosyncratic) risk is specific to individual companies or industries and can be significantly reduced by holding a diversified portfolio of securities.
Inflation risk in a fixed-income fund primarily refers to the danger that:
Answer: Rising inflation will erode the purchasing power of fixed interest payments
Inflation risk means that the real value of fixed interest payments declines when inflation rises, reducing the purchasing power of income generated by the fund.
A fund manager uses asset allocation to manage risk by distributing investments among equities, bonds, and cash equivalents. This approach primarily manages:
Answer: Overall portfolio risk through diversification across asset classes
Strategic asset allocation across different asset classes (equities, bonds, cash) reduces overall portfolio risk since different asset classes often respond differently to market conditions.
Which document is required to disclose the risks associated with investing in a Canadian mutual fund to potential investors?
Answer: Fund facts document
The Fund Facts document is a mandatory, plain-language disclosure document that must be provided to investors, containing key risk information about a Canadian mutual fund.
Reinvestment risk in a bond fund occurs when:
Answer: Interest rates fall, forcing coupon payments to be reinvested at lower rates
Reinvestment risk is the possibility that future coupon payments must be reinvested at lower interest rates than the original bond's yield, reducing overall returns.