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Asset Classes Flashcards

6 cards from real IMC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. What is 'credit risk' in the context of bond investing?

    Answer: The risk that the bond issuer will default on interest or principal payments

    Credit risk (default risk) is the risk that the bond issuer will be unable to make scheduled interest payments or repay principal at maturity. Higher credit risk bonds (high yield/junk bonds) offer higher yields to compensate investors.

  2. What is the 'equity risk premium' (ERP)?

    Answer: The additional return investors expect from equities over the risk-free rate, as compensation for higher risk

    The equity risk premium is the excess return that investing in the stock market is expected to provide over a risk-free rate (such as gilts). It compensates investors for accepting the additional volatility and risk of equities versus 'safe' government bonds.

  3. What is a 'real return' on an investment?

    Answer: The return adjusted for inflation

    Real return is the nominal (stated) return adjusted for inflation. If an investment returns 6% nominally but inflation is 3%, the real return is approximately 3%. Real returns reflect the actual increase in purchasing power.

  4. What is 'currency risk' in international investing?

    Answer: The risk that exchange rate movements will reduce returns when investing in foreign assets

    Currency risk arises when investing in assets denominated in foreign currencies. If sterling strengthens against the investment's currency, the sterling value of returns falls even if the underlying investment performs well.

  5. What is a 'real asset'?

    Answer: A tangible physical asset such as property, infrastructure, or commodities that typically provides a hedge against inflation

    Real assets are tangible physical assets with intrinsic value — including real estate, infrastructure, commodities, and timberland. They often provide inflation-linked returns, as their values and income streams tend to rise with inflation.

  6. What does 'correlation' mean in portfolio construction?

    Answer: A statistical measure of how two assets move in relation to each other, ranging from -1 to +1

    Correlation measures the degree to which two assets move together. A correlation of +1 means perfect positive correlation (move identically), -1 means perfect inverse correlation, and 0 means no relationship. Low correlation between assets improves diversification.