Investment and Financial Markets (SOA IFM) Exam
1. What is the primary purpose of investment?
A) To speculate on market movements
B) To preserve capital for future use
C) To generate income and grow wealth
D) To diversify risk
Answer: C) To generate income and grow wealth
Explanation: The primary purpose of investment is to generate income
and grow wealth over time, as opposed to speculation which involves
higher risks for short-term gains.
2. Which of the following describes the main difference between
investment and speculation?
A) Investment guarantees returns while speculation does not
B) Investment is focused on long-term gains while speculation focuses on
short-term profits
C) Investment involves lower risk compared to speculation
D) Speculation relies on research, while investment does not
Answer: B) Investment is focused on long-term gains while speculation
focuses on short-term profits
,Investment and Financial Markets (SOA IFM) Exam
Explanation: Investment typically involves a longer time horizon and
focuses on capital appreciation and income, while speculation is often
aimed at short-term price movements.
3. What is meant by 'liquidity' in investment terms?
A) The risk associated with bond investments
B) The ability to convert an investment into cash without significantly
affecting its price
C) The return generated from an investment
D) The legal rights of shareholders
Answer: B) The ability to convert an investment into cash without
significantly affecting its price
Explanation: Liquidity refers to how quickly and easily an asset can be
converted to cash without greatly impacting its market value.
4. Which of the following is NOT a characteristic of equity investments?
A) Ownership in a company
B) Fixed interest payments
C) Potential for capital appreciation
D) Voting rights
,Investment and Financial Markets (SOA IFM) Exam
Answer: B) Fixed interest payments
Explanation: Equity investments typically provide ownership rights and
the potential for capital appreciation, unlike fixed income investments
which provide fixed interest payments.
5. An investor focused on capital preservation would likely prioritize
which type of investment?
A) Growth stocks
B) Technology stocks
C) Government bonds
D) Real estate flipping
Answer: C) Government bonds
Explanation: Government bonds are generally considered low-risk
investments that help preserve capital while providing a stable return.
6. What is the efficient market hypothesis (EMH) primarily concerned
with?
A) The relationship between bonds and equities
B) The predictability of stock prices
C) The market's ability to reflect all available information in asset prices
, Investment and Financial Markets (SOA IFM) Exam
D) The impact of interest rates on the stock market
Answer: C) The market's ability to reflect all available information in
asset prices
Explanation: The EMH posits that asset prices fully reflect all available
information, making it impossible to consistently achieve higher returns
than the overall market through stock selection.
7. Which of the following best describes a primary market?
A) A marketplace for the sale of existing securities
B) A market where companies issue new securities to raise capital
C) A market where investors trade derivatives
D) A market for foreign currency exchange
Answer: B) A market where companies issue new securities to raise
capital
Explanation: The primary market is where new securities are created and
sold to investors for the first time, often to raise capital.
8. A bond's yield to maturity (YTM) primarily reflects which of the
following?
A) The coupon rate of the bond
1. What is the primary purpose of investment?
A) To speculate on market movements
B) To preserve capital for future use
C) To generate income and grow wealth
D) To diversify risk
Answer: C) To generate income and grow wealth
Explanation: The primary purpose of investment is to generate income
and grow wealth over time, as opposed to speculation which involves
higher risks for short-term gains.
2. Which of the following describes the main difference between
investment and speculation?
A) Investment guarantees returns while speculation does not
B) Investment is focused on long-term gains while speculation focuses on
short-term profits
C) Investment involves lower risk compared to speculation
D) Speculation relies on research, while investment does not
Answer: B) Investment is focused on long-term gains while speculation
focuses on short-term profits
,Investment and Financial Markets (SOA IFM) Exam
Explanation: Investment typically involves a longer time horizon and
focuses on capital appreciation and income, while speculation is often
aimed at short-term price movements.
3. What is meant by 'liquidity' in investment terms?
A) The risk associated with bond investments
B) The ability to convert an investment into cash without significantly
affecting its price
C) The return generated from an investment
D) The legal rights of shareholders
Answer: B) The ability to convert an investment into cash without
significantly affecting its price
Explanation: Liquidity refers to how quickly and easily an asset can be
converted to cash without greatly impacting its market value.
4. Which of the following is NOT a characteristic of equity investments?
A) Ownership in a company
B) Fixed interest payments
C) Potential for capital appreciation
D) Voting rights
,Investment and Financial Markets (SOA IFM) Exam
Answer: B) Fixed interest payments
Explanation: Equity investments typically provide ownership rights and
the potential for capital appreciation, unlike fixed income investments
which provide fixed interest payments.
5. An investor focused on capital preservation would likely prioritize
which type of investment?
A) Growth stocks
B) Technology stocks
C) Government bonds
D) Real estate flipping
Answer: C) Government bonds
Explanation: Government bonds are generally considered low-risk
investments that help preserve capital while providing a stable return.
6. What is the efficient market hypothesis (EMH) primarily concerned
with?
A) The relationship between bonds and equities
B) The predictability of stock prices
C) The market's ability to reflect all available information in asset prices
, Investment and Financial Markets (SOA IFM) Exam
D) The impact of interest rates on the stock market
Answer: C) The market's ability to reflect all available information in
asset prices
Explanation: The EMH posits that asset prices fully reflect all available
information, making it impossible to consistently achieve higher returns
than the overall market through stock selection.
7. Which of the following best describes a primary market?
A) A marketplace for the sale of existing securities
B) A market where companies issue new securities to raise capital
C) A market where investors trade derivatives
D) A market for foreign currency exchange
Answer: B) A market where companies issue new securities to raise
capital
Explanation: The primary market is where new securities are created and
sold to investors for the first time, often to raise capital.
8. A bond's yield to maturity (YTM) primarily reflects which of the
following?
A) The coupon rate of the bond
