R02 Currency, political, regulatory, operational and shortfall risk: free practice questions
5 free questions on Currency, political, regulatory, operational and shortfall risk, part of learning outcome 5 (Investment risk). Pick an answer to check it, or open the answer to see why each option is right or wrong.
Question 1 of 5
A UK investor holds US shares. Sterling strengthens against the dollar. What happens to the value of her holding in sterling terms?
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The answer is A: It falls
A strong pound reduces the sterling value of US capital growth and dollar dividends. A weak pound enhances them, as after the 2016 EU referendum.
Why the other options are wrong
B
Exchange rate moves change the sterling value.
C
A stronger pound means each dollar buys fewer pounds.
D
Both capital and dividends are reduced in sterling terms.
Question 2 of 5
What does political risk describe?
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The answer is D: A change of government or policy leading to fiscal or monetary changes
Political risk is the risk that a new government or policy change will revise fiscal and monetary objectives, possibly including major tax changes, as in autumn 2022 when a 'growth plan' caused gilt yields to surge.
Why the other options are wrong
A
That's currency risk.
B
That's a form of regulatory risk.
C
That's operational risk.
Question 3 of 5
Which regulatory risk is especially relevant in some emerging and frontier markets?
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The answer is B: Difficulty dealing or proving legal title to securities
Inefficient market mechanisms can make dealing expensive and uncertain, and make it hard to establish legal title to securities. Weaker accounting standards can also mislead investors.
Why the other options are wrong
A
These relate to commercial property leases.
C
That's a withdrawal effect, not a regulatory risk.
D
That relates to UK bank resolution.
Question 4 of 5
A fund's ACD fails to monitor the liquidity of its unlisted holdings, and the fund is suspended when investors rush to sell. Which risk does the ACD's failure represent?
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The answer is D: Operational risk
Failing to monitor liquidity adequately is a failure in the investment process: operational risk. In one well-known case, a compensation package of hundreds of millions of pounds followed.
Why the other options are wrong
A
No change of government or policy was involved.
B
The problem arose from the fund's own processes, not the whole market.
C
Exchange rates weren't the cause.
Question 5 of 5
A client's savings plan is projected to fall short of the amount needed. Which of these is one of his options?
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The answer is B: Saving for a longer period
Facing a shortfall, an investor can reduce the target, increase the amount saved or invested, or save or invest for longer.
Why the other options are wrong
A
That reduces the amount saved.
C
Cash may make the shortfall worse over the long term.
D
That would widen the shortfall.
Practise all 13 Currency, political, regulatory, operational and shortfall risk questions
These are 5 of the 13 questions on this topic in R0 Exam Prep, and the full R02 bank covers every learning outcome. Practise free, track your weak areas and sit timed mocks.
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