IMC Quantitative Methods and Risk 2

Question 1

What is the difference between systematic and unsystematic risk?

Accepted Answer

Systematic risk affects the entire market and cannot be diversified away; unsystematic risk is company-specific and can be reduced through diversification

Answer

Systematic risk affects a single company; unsystematic risk affects the whole market

Answer

Both types of risk can be completely eliminated through diversification

Answer

There is no practical difference between them

Question 2

An investor holds a bond portfolio and is concerned about rising interest rates. Which hedging strategy would be most appropriate?

Accepted Answer

Sell interest rate futures (go short)

Answer

Buy call options on bonds

Answer

Buy more bonds with longer duration

Answer

Increase the allocation to equities

Question 3

What is the holding period return (HPR) for a share purchased at £50, sold at £58, with £2 in dividends received?

Accepted Answer

20%

Answer

16%

Answer

10%

Answer

4%

Question 4

What does a normal distribution assumption imply about investment returns?

Accepted Answer

Returns are symmetrically distributed around the mean, with most observations clustered near the average

Answer

All returns will be positive

Answer

Extreme events are more likely than a normal distribution would predict

Answer

Returns follow a predictable upward trend

Question 5

What is the Sharpe ratio of a portfolio with a return of 12%, a risk-free rate of 3%, and a standard deviation of 15%?

Accepted Answer

0.60

Answer

0.80

Answer

1.25

Answer

0.20

Question 6

What is 'operational risk' in the context of investment management?

Accepted Answer

The risk of loss resulting from inadequate or failed internal processes, people, systems, or external events

Answer

The risk that a counterparty defaults on a transaction

Answer

The risk that market prices move against a position

Answer

The risk that an investor cannot sell a security quickly enough