Premium Bases Margins MCQs

Welcome to our comprehensive collection of Multiple Choice Questions (MCQs) on Premium Bases Margins, a fundamental topic in the field of IC 92 Actuarial Aspects of Product Development. Whether you're preparing for competitive exams, honing your problem-solving skills, or simply looking to enhance your abilities in this field, our Premium Bases Margins MCQs are designed to help you grasp the core concepts and excel in solving problems.

In this section, you'll find a wide range of Premium Bases Margins mcq questions that explore various aspects of Premium Bases Margins problems. Each MCQ is crafted to challenge your understanding of Premium Bases Margins principles, enabling you to refine your problem-solving techniques. Whether you're a student aiming to ace IC 92 Actuarial Aspects of Product Development tests, a job seeker preparing for interviews, or someone simply interested in sharpening their skills, our Premium Bases Margins MCQs are your pathway to success in mastering this essential IC 92 Actuarial Aspects of Product Development topic.

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Premium Bases Margins MCQs | Page 3 of 7

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Q21.
How is the expected return on an asset (Ei) calculated in the CAPM formula?

a.

Ei = rf + (Em - rf)

b.

Ei = rf x (Em - rf) x bi

c.

Ei = rf + (Em - rf) x bi

d.

Ei = rf - (Em - rf) x bi

Discuss
Answer: (c).Ei = rf + (Em - rf) x bi Explanation:The expected return on an asset (Ei) in the CAPM formula is calculated using the equation Ei = rf + (Em - rf) x bi, where rf is the return on a risk-free asset, Em is the expected market return, and bi is the beta factor of the asset.
Q22.
What does a beta value greater than 1 imply in the context of the CAPM?

a.

The asset's return is less volatile than the market return

b.

The asset's return is more volatile than the market return

c.

The asset's return is equal to the market return

d.

The asset's return is not affected by market fluctuations

Discuss
Answer: (b).The asset's return is more volatile than the market return Explanation:A beta value greater than 1 in the CAPM implies that the asset's return is more volatile than the market return. This suggests that the asset's value will increase more than the market average during market upswings and decrease more during market downturns.
Q23.
What does the Capital Asset Pricing Model (CAPM) primarily focus on when estimating risk?

a.

Specific risk of the asset

b.

Market risk of the asset

c.

Historical returns of the asset

d.

Diversification benefits of the asset

Discuss
Answer: (b).Market risk of the asset Explanation:The CAPM primarily focuses on estimating the market risk or systematic risk of the asset, which is the risk associated with overall market movements. It does not consider the specific risk associated with the issuing company, as this can be diversified away.
Q24.
Why does the CAPM not account for specific risk in its risk estimation?

a.

Specific risk is assumed to be negligible for the asset

b.

Specific risk is eliminated through diversification

c.

Specific risk is accounted for separately in the model

d.

Specific risk is considered irrelevant for market analysis

Discuss
Answer: (b).Specific risk is eliminated through diversification Explanation:The CAPM does not account for specific risk because it assumes that investors can diversify their portfolios to eliminate company-specific risk. Therefore, the model focuses only on market risk or systematic risk.
Q25.
How does the availability of capital influence the shareholders' required return on capital?

a.

It decreases the required return due to increased competition

b.

It increases the required return due to reduced competition

c.

It has no effect on the required return

d.

It leads to unpredictable changes in the required return

Discuss
Answer: (b).It increases the required return due to reduced competition Explanation:When capital is less readily available, companies may need to offer higher returns to attract investors, leading to an increase in the required return on capital. This is because the scarcity of capital increases competition among companies for investment, resulting in higher returns being demanded by shareholders.
Q26.
Who is the final judge of what constitutes an appropriate rate of return for shareholders?

a.

The actuary

b.

The company's management

c.

The market

d.

The regulatory authorities

Discuss
Answer: (c).The market Explanation:While the actuary may make assumptions regarding the rate of return for shareholders, the market ultimately determines what is considered appropriate. The market's assessment of a company's shares, influenced by factors such as risk and investor demand, determines the rate of return required by shareholders.
Q27.
Why can't the overall rate of return from the Capital Asset Pricing Model (CAPM) be directly used as the risk discount rate in pricing models?

a.

Because it doesn't consider the market's assessment of the company's shares

b.

Because it doesn't differentiate between risky and non-risky projects

c.

Because it doesn't account for the company's long-term profitability

d.

Because it doesn't reflect the specific risks associated with individual projects

Discuss
Answer: (d).Because it doesn't reflect the specific risks associated with individual projects Explanation:The CAPM provides an overall rate of return that shareholders expect to compensate for the risks involved in investing in a company. However, this rate may not reflect the specific risks associated with individual projects or products. Therefore, it cannot be directly used as the risk discount rate in pricing models, which require consideration of project-specific risks.
Q28.
How does launching a new product with innovative design features affect the risk discount rate?

a.

It decreases the risk discount rate due to diversification benefits.

b.

It has no impact on the risk discount rate.

c.

It increases the risk discount rate to satisfy shareholders' demand for higher returns.

d.

It stabilizes the risk discount rate regardless of market conditions.

Discuss
Answer: (c).It increases the risk discount rate to satisfy shareholders' demand for higher returns. Explanation:Launching a new product with innovative design features changes the market's evaluation of the company's riskiness. This change in risk perception leads to an increased demand for higher returns from the company's shareholders. Consequently, the risk discount rate needs to be higher to satisfy this demand for higher returns.
Q29.
How does a change in the mix of business impact the market's evaluation of a company's riskiness?

a.

It reduces the demand for higher returns from shareholders.

b.

It has no effect on the market's evaluation of riskiness.

c.

It increases the risk discount rate required by shareholders.

d.

It leads to a decrease in the overall market risk premium.

Discuss
Answer: (c).It increases the risk discount rate required by shareholders. Explanation:A change in the mix of business, particularly towards new and innovative contracts, alters the perception of a company's riskiness in the market. This change results in an increased demand for higher returns from shareholders, leading to a higher risk discount rate being required to satisfy this demand.
Q30.
How does the lack of historical data affect the riskiness of a product design?

a.

It reduces the risk by providing insights into future trends.

b.

It increases the risk by making the future more uncertain.

c.

It has no impact on the riskiness of the product.

d.

It stabilizes the risk by minimizing potential fluctuations.

Discuss
Answer: (b).It increases the risk by making the future more uncertain. Explanation:The absence of historical data limits the company's ability to identify trends and patterns for future projections. This uncertainty about future outcomes increases the risk associated with the product design.
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