Chapter 9 - CPCU

A financial manager is looking to add XYZ stock to the company's investment portfolio. The manager's research shows that XYZ stock is currently returning at 8%, while the market rate is 5%. Based on this information, XYZ stock likely has a beta of

Greater than 1

Reinvestment risk is the uncertainty about the rate at which periodic interest payments can be reinvested over the life of an investment. When the duration of the underwriting and investment portfolios are matched the portfolio is said to be

Immunized against changes in interest rates

Investor A holds an investment portfolio comprised solely of bonds while Investor B's portfolio consists solely of stocks. While both investors share certain investments related financial risks, to which one of the following does Investor A have a greater exposure?

Interest Rate Risk

Investor A holds an investment portfolio comprised solely of bonds while Investor B's portfolio consists solely of stocks. While both investors share certain investment related financial risks, to which one of the following does Investor A have greater exposure?

Interest rate risk

In keeping with a conservative approach to insurer solvency, the primary constraints are on insurer

Investment practices

An insurance company's investment strategy must be tied to its underwriting strategy because

Investment returns are used to pay losses as they come due

An advantage of using the standard deviation instead of the variance when evaluating the riskiness of returns of an investment portfolio is that the standard deviation

Is expressed in the same units of measure as the original dataset

John is risk-adverse and has a choice between investing $10,000 in a U.S. Government bond paying 4% or in a corporate common stock that is expected to pay 4%. Which one of the following is a correct statement regarding this choice/

John would choose the government bond due to less risk being involved for the same likely return

The returns of Company A and Company B are uncorrelated, with each returning 8% with a standard deviation of 12%. An insurer that places $1,000,000 in Company A or Company B will earn $80,000 with a standard deviation of 12%. If instead the insurer places $500,000 in Company A and $500,000 in Company B, the return is $80,000 and the standard deviation is

Less than +12%

Based on the coefficient of variation, which one of the following investment portfolios has the lowest relative risk?

Mean return of 10%; standard deviation of 25%

Beta is a measure of relative risk. An investment portfolio consisting entirely of U.S. Treasury securities would have a beta

Of exactly zero

A portfolio approach is often used to make decisions regarding an investment. Which one of the following is a true statement regarding Modern Portfolio Theory?

Once the efficient frontier is reached, no new risk sources can make the portfolio more efficient

A portfolio approach is often used to make decisions regarding an investment. Which one of the following is a true statement regarding MPT (Modern Portfolio Theory)?

Once the efficient frontier is reached, no new risk sources can make the portfolio more efficient.

Investment managers are often judged on the performance of a stock portfolio relative to a particular market index, adjusted for the portfolio's beta. Which one of the following investment portfolios would be most likely to match the overall returns for the S&P 500 stock index?

Portfolio C with beta of 1.0

Which one of the following statements about portfolio diversification is the most accurate?

Portfolio diversification reduces the investor's exposure to company-specific events such as strikes or products liability lawsuits, but does not eliminate general market risk

Which one of the following is the primary source of constraints imposed on insurer investment practices?

State regulators

Stock X exhibits a standard deviation of 15.8 and an average rate of return of 8.9. Stock Y exhibits a standard deviation of 28.6 and an average rate of return of 15.4 percent. Comparing the coefficient of variation of each stock suggests that

Stock Y is riskier than Stock X

When quantifying an investment risk by it's variance, to measure the deviation of an investment's return from the average, it is useful to convert the variance units back to

The data set units by taking the square root of the answer

When quantifying an investment risk by its variance, to measure the deviation of an investment's return from the average, it is useful to convert the variance units back to

The data set units by taking the square root of the answer

There are two important characteristics of bond duration. Which one of the following is a correct one of these characteristics?

The duration of a zero-coupon bonds is always equal to its time to maturity

Cash matching provides a means of eliminating interest rate risk for an insurer by investing in bonds today to be able t o pay for a large dollar obligation in the future. Which one of the following would be a significant limitation int he strategy of using this approach?

The inability of being able to purchase zero-coupon bonds that will match the expected cash outflow

Cash matching provides a means of eliminating interest rate risk for an insurer by investing in bonds today to be able to pay for a large dollar obligation in the future. Which one of the following would be a significant limitation in the strategy of using this approach?

The inability of being able to purchase zero-coupon bonds that will match the expected cash outflow

Which one of the following would be a correct statement regarding two corporate common stocks whose values tend to move in opposite directions from each other as the market goes up and down

They would be negatively correlated

Which one of the following would be a correct statement regarding two corporate common stocks whose values tend to move in opposite directions from each other as the market goes up and down?

They would be negatively correlated

Which one of the following investments would be the most exposed to interest rate risk?

U.S. Treasury bonds

By diversifying one's investment exposure by investing in stocks, bonds, real estate, and commodities, which one of the following risks would be most affected

Unsystematic Risk

Financial theory assumes that investors are risk averse. Which one of the following statements best describes risk averse behavior?

When faced with a choice of investments that have the same potential payoff, a risk-averse investor will choose the one with the least risk

Standard deviation may not be as accurate a measure of risk as the coefficient or variation when comparing two or more data sets

With elements of different magnitude

Reinvestment risk is the uncertainty about the rate at which periodic interest payments can be reinvested. Which one of the following investments would have the lowest reinvestment risk?

Zero Coupon Treasury Bonds

An asset's beta coefficient describes the variability in the price of the asset. Which one of the following beta's would represent the least volatile stock price?

0.78

When an insurer has a properly diversified investment portfolio, the insurer can expect

A reduced risk for a given level of return

Marion Insurance anticipates making a one-time $1 million payment in five years for a large liability loss. The investment vehicle that would provide the least amount of interest rate risk if Marion intends to cash-match its investment and underwriting portfolios would be

A zero-coupon bonds with a five-year maturity date

Insurers invest heavily in bonds. The most important objective about bond portfolio management is to construct a portfolio in such a way that

Amount and timing of the investment cash inflows matches the firm's expected cash outflows

ABC's current investment portfolio of common stock is expected to earn a return of 14% this year, given that the risk-free rate is 5% and the expected return for the entire stock market if 15%. ABC is considering adding a new investment that has a beta of 0.8 to its existing portfolio. Assuming ABC makes that investment, it should expect investment returns

And investment risk to both decrease

If an insurer could precisely match the maturity value of its bond investments with the amount of expected loss payments in the future so that the cash inflows exactly matched the cash outflows, it could reduce its exposure to interest rate risk, which is the uncertainty about

Asset values resulting from changes in market interest rates

Which one of the following represents the largest class of assets owned by property-casualty insurers?

Bonds