Financial Risk Management – Midterm, 2026 – Study Material
and Practice Questions
T/F: Other things being equal, when investors expect inflation to decrease, the price of bonds
should go down. - ANS✔✔ False
Financial intermediaries get funds by issuing financial claims against themselves to market
participants, and then investing those funds. The investments made by financial intermediaries
can be in ________.
A) loans but not in securities.
B) securities but not in loans.
C) loans and/or securities.
D) only equity. - ANS✔✔ C) loans and/or securities.
T/F: Stock markets, where investors buy and sell shares in the stock of equity capital of
companies, are also known as credit markets. - ANS✔✔ False
Inflation tends to have a particularly no impact on the price of
A) real estate.--> positive impact
B) bonds.
C) gold.-->
D) none of the above - ANS✔✔ D) none of the above
T/F: In the primary market, investors buy securities (bonds and stocks) from the company
issuing them, while in the secondary market, they trade securities amongst themselves. Is this
statement true or false? - ANS✔✔ True
,T/F: Over the past 15 years, asset manager U has averaged a 7.3% risk-adjusted annual rate of
return with a standard deviation of 4.44%. Over the same period, asset manager L has averaged
an 8.1% risk-adjusted annual rate of return with a standard deviation of 6.94%. In terms of the
risk analysis the performance of asset manager L has been better than the performance of asset
manager U, because of the higher rate of return. Is that last statement true or false? - ANS✔✔
TRUE--> because this happened in the past, if it was in future it would be false
Which of the following statements is an example of a risk averse investor?
A) An investor that invests 100% in Government bond
B) An investor that invests 100% in a Corporate Bond - AAA bond
C) An investor that invests in Junk Bonds
D) An investor that keeps the money at home. - ANS✔✔ A) An investor that invests 100% in
Government bond
Reading the Financial Markets: Brexit (37 points)
After the first vote of the Brexit and getting out of the European Union, this how financial
markets reacted:
Friday, May 21 (before the election)
. UK sovereign 10-year bond yield: 1.25%
. German sovereign 10-year bond yield: 0.24%
. Credit Default Swap on UK bond: 114 basis points
. GBP/EUR: 1.0728
Monday, May 24 (after the election)
. UK sovereign 10-year bond yield: 2%
. German sovereign 10-year bond yield: 0.41%
. Credit Default Swap on UK bond: 71 basis points
. GBP/EUR: 1.0926
, Explain the reaction of investors in financial markets and state if the overall level of risk has
increased or decreased. - ANS✔✔ Because of the first vote of Brexit, the reaction of investors in
financial markets was that UK sovereign 10-year bond yield increased by 0.75%, German
sovereign 10-year bond yield increased by 0.17%, Credit Default Swap on UK bond decreased by
43 basis points, and GBP/EUR increased by 0.0198. This all occurred because the overall level of
risk had increased. The UK risk free went up way too much in 3 days, signaling an interest-rate
risk. The German risk free ?. The CDS decreasing shows that people were selling them, which
shows that they were concerned about the CDS's risk. They thought the CDS would default so
they wanted out. The GBP/EUR increasing was positive for the economy as it signaled a higher
Euro value.
1) An asset is a possession that has value in an exchange and can be classified as ________.
A) financial or intangible.
B) financial or variable.
C) tangible or intangible.
D) fixed or variable. - ANS✔✔ C) tangible or intangible.
2) The financial asset is referred to as a ________ if the claim is a fixed dollar.
A) debt instrument.
B) common equity instrument.
C) derivative instrument.
D) preferred equity instrument. - ANS✔✔ A) debt instrument.
3) Asset management firms receive their compensation ________ from management fees
charged based on the market value of the assets managed for clients
A) primarily
B) secondarily
C) totally
and Practice Questions
T/F: Other things being equal, when investors expect inflation to decrease, the price of bonds
should go down. - ANS✔✔ False
Financial intermediaries get funds by issuing financial claims against themselves to market
participants, and then investing those funds. The investments made by financial intermediaries
can be in ________.
A) loans but not in securities.
B) securities but not in loans.
C) loans and/or securities.
D) only equity. - ANS✔✔ C) loans and/or securities.
T/F: Stock markets, where investors buy and sell shares in the stock of equity capital of
companies, are also known as credit markets. - ANS✔✔ False
Inflation tends to have a particularly no impact on the price of
A) real estate.--> positive impact
B) bonds.
C) gold.-->
D) none of the above - ANS✔✔ D) none of the above
T/F: In the primary market, investors buy securities (bonds and stocks) from the company
issuing them, while in the secondary market, they trade securities amongst themselves. Is this
statement true or false? - ANS✔✔ True
,T/F: Over the past 15 years, asset manager U has averaged a 7.3% risk-adjusted annual rate of
return with a standard deviation of 4.44%. Over the same period, asset manager L has averaged
an 8.1% risk-adjusted annual rate of return with a standard deviation of 6.94%. In terms of the
risk analysis the performance of asset manager L has been better than the performance of asset
manager U, because of the higher rate of return. Is that last statement true or false? - ANS✔✔
TRUE--> because this happened in the past, if it was in future it would be false
Which of the following statements is an example of a risk averse investor?
A) An investor that invests 100% in Government bond
B) An investor that invests 100% in a Corporate Bond - AAA bond
C) An investor that invests in Junk Bonds
D) An investor that keeps the money at home. - ANS✔✔ A) An investor that invests 100% in
Government bond
Reading the Financial Markets: Brexit (37 points)
After the first vote of the Brexit and getting out of the European Union, this how financial
markets reacted:
Friday, May 21 (before the election)
. UK sovereign 10-year bond yield: 1.25%
. German sovereign 10-year bond yield: 0.24%
. Credit Default Swap on UK bond: 114 basis points
. GBP/EUR: 1.0728
Monday, May 24 (after the election)
. UK sovereign 10-year bond yield: 2%
. German sovereign 10-year bond yield: 0.41%
. Credit Default Swap on UK bond: 71 basis points
. GBP/EUR: 1.0926
, Explain the reaction of investors in financial markets and state if the overall level of risk has
increased or decreased. - ANS✔✔ Because of the first vote of Brexit, the reaction of investors in
financial markets was that UK sovereign 10-year bond yield increased by 0.75%, German
sovereign 10-year bond yield increased by 0.17%, Credit Default Swap on UK bond decreased by
43 basis points, and GBP/EUR increased by 0.0198. This all occurred because the overall level of
risk had increased. The UK risk free went up way too much in 3 days, signaling an interest-rate
risk. The German risk free ?. The CDS decreasing shows that people were selling them, which
shows that they were concerned about the CDS's risk. They thought the CDS would default so
they wanted out. The GBP/EUR increasing was positive for the economy as it signaled a higher
Euro value.
1) An asset is a possession that has value in an exchange and can be classified as ________.
A) financial or intangible.
B) financial or variable.
C) tangible or intangible.
D) fixed or variable. - ANS✔✔ C) tangible or intangible.
2) The financial asset is referred to as a ________ if the claim is a fixed dollar.
A) debt instrument.
B) common equity instrument.
C) derivative instrument.
D) preferred equity instrument. - ANS✔✔ A) debt instrument.
3) Asset management firms receive their compensation ________ from management fees
charged based on the market value of the assets managed for clients
A) primarily
B) secondarily
C) totally
