IFC Risk Management 3

Question 1

Systematic risk in an investment portfolio refers to:

Accepted Answer

Risk affecting the entire market that cannot be diversified away

Answer

Systematic (market) risk stems from economy-wide factors like recessions or interest rate changes and affects all securities; it cannot be eliminated through diversification.

Question 2

A fund's beta of 1.5 indicates that the fund is expected to:

Accepted Answer

Move 1.5 times the market's movement in the same direction

Answer

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.

Question 3

Which of the following best describes unsystematic risk?

Accepted Answer

Company-specific risk that can be reduced through diversification

Answer

Unsystematic (idiosyncratic) risk is specific to individual companies or industries and can be significantly reduced by holding a diversified portfolio of securities.

Question 4

Inflation risk in a fixed-income fund primarily refers to the danger that:

Accepted Answer

Rising inflation will erode the purchasing power of fixed interest payments

Answer

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.

Question 5

A fund manager uses asset allocation to manage risk by distributing investments among equities, bonds, and cash equivalents. This approach primarily manages:

Accepted Answer

Overall portfolio risk through diversification across asset classes

Answer

Strategic asset allocation across different asset classes (equities, bonds, cash) reduces overall portfolio risk since different asset classes often respond differently to market conditions.

IFC - Investment Funds in Canada Practice Test

IFC - Investment Funds in Canada Practice Test

IFC Risk Management 3