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.

Note: Each of the following question comes with multiple answer choices. Select the most appropriate option and test your understanding of Premium Bases Margins. You can click on an option to test your knowledge before viewing the solution for a MCQ. Happy learning!

So, are you ready to put your Premium Bases Margins knowledge to the test? Let's get started with our carefully curated MCQs!

Premium Bases Margins MCQs | Page 3 of 7

Discover more Topics under IC 92 Actuarial Aspects of Product Development

Q21.
What is a suitable proxy for representing risk-free assets in the Capital Asset Pricing Model (CAPM)?

a.

Stocks of stable government-owned companies

b.

Bonds issued by a stable government

c.

Corporate bonds with high credit ratings

d.

Shares of well-diversified portfolios

Discuss
Answer: (b).Bonds issued by a stable government Explanation:Bonds issued by a stable government are commonly chosen as a suitable proxy for representing risk-free assets in the Capital Asset Pricing Model (CAPM) due to their relatively low risk of default.
Q22.
How is risk measured in the context of the CAPM?

a.

By comparing the returns of government bonds with corporate bonds

b.

By analyzing the historical performance of individual stocks

c.

By comparing the returns of equities with a risk-free asset over time

d.

By assessing the credit ratings of different investment instruments

Discuss
Answer: (c).By comparing the returns of equities with a risk-free asset over time Explanation:In the context of the CAPM, risk is measured by comparing the returns of equities with a risk-free asset, such as government bonds, over a period of time to evaluate the difference in return and assess risk levels.
Q23.
How does the CAPM determine the proper risk premium for a particular share?

a.

By assessing the company's market capitalization

b.

By analyzing the company's historical earnings

c.

By evaluating the company's Beta coefficient

d.

By comparing the company's dividend yield with industry averages

Discuss
Answer: (c).By evaluating the company's Beta coefficient Explanation:The CAPM determines the proper risk premium for a particular share by evaluating the company's Beta coefficient, which measures the stock's volatility relative to the market. The risk premium is proportional to the Beta, indicating higher premiums for riskier stocks.
Q24.
What does the beta factor (bi) represent in the Capital Asset Pricing Model (CAPM)?

a.

The risk-free rate of return on the asset

b.

The expected market return on the asset

c.

The riskiness of the asset relative to the market

d.

The covariance of the asset's return with the market return

Discuss
Answer: (c).The riskiness of the asset relative to the market Explanation:In the CAPM, the beta factor (bi) represents the riskiness of the asset relative to that of the market. A beta value greater than 1 indicates higher volatility compared to the market, while a value less than 1 indicates lower volatility.
Q25.
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.
Q26.
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.
Q27.
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.
Q28.
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.
Q29.
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.
Q30.
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.
Page 3 of 7