IFC Risk Management 2

Question 1

A mutual fund manager wants to reduce the impact of a single stock's poor performance on the overall portfolio. Which risk management technique best addresses this concern?

Accepted Answer

Diversification

Answer

Diversification spreads investments across multiple securities, reducing the impact of any single holding's poor performance on the overall portfolio.

Question 2

Which type of risk refers to the possibility that a fund cannot meet redemption requests without selling assets at unfavorable prices?

Accepted Answer

Liquidity risk

Answer

Liquidity risk is the danger that a fund cannot quickly convert assets to cash at fair market value to meet investor redemption demands.

Question 3

An investment fund holds bonds from a corporation that subsequently declares bankruptcy. Which type of risk has materialized?

Accepted Answer

Credit risk

Answer

Credit risk (default risk) is the possibility that a bond issuer will fail to make promised interest or principal payments, as occurs in bankruptcy.

Question 4

When interest rates rise, what generally happens to the value of existing fixed-income securities in a fund?

Accepted Answer

They decrease in value

Answer

Bond prices have an inverse relationship with interest rates; when rates rise, existing bonds with lower coupon rates become less attractive, causing their prices to fall.

Question 5

A Canadian mutual fund invests in US equities. If the Canadian dollar strengthens against the US dollar, what is the likely impact on the fund's returns for Canadian investors?

Accepted Answer

Returns decrease

Answer

When the Canadian dollar strengthens, US-denominated returns are worth less when converted back to Canadian dollars, reducing the fund's overall returns for Canadian investors.

IFC - Investment Funds in Canada Practice Test

IFC - Investment Funds in Canada Practice Test

IFC Risk Management 2