economics beginner 10 sample questions

Investment Vehicles MCQ Practice Test

Securities, bonds, and funds

Q1. A fund that allows investors to pool their money to invest in a diversified portfolio of real estate investment trusts (REITs) is known as a:

Explanation: A Real Estate Mutual Fund pools money from investors to invest in a diversified portfolio of real estate investment trusts (REITs). This provides investors with exposure to the real estate market without directly owning property.

Q2. A pension fund manager is considering investing in a “real assets” strategy, which involves investing in infrastructure projects such as toll roads and bridges. The manager is concerned about the potential risks associated with this type of investment. Which of the following is a key characteristic of real assets investments that may mitigate some of the risks associated with them?

Explanation: Real assets investments, such as infrastructure projects, tend to have a low correlation with traditional asset classes, such as stocks and bonds. This means that their performance is not highly influenced by the performance of these traditional asset classes, which can help to mitigate some of the risks associated with real assets investments. This characteristic can help to reduce the overall portfolio risk and increase potential returns.

Q3. A pension fund is considering investing in a real estate investment trust (REIT) that is structured as a master\-limited partnership (MLP). Which of the following is a key benefit of this structure for the REIT?

Explanation: In an MLP structure, the REIT is considered a partnership for tax purposes, which means that it is not subject to entity-level taxation. Instead, the partnership income is passed through to the investors, who report their share of the income on their personal tax returns.

Q4. Which investment vehicle is characterized by its ability to issue a type of security that has a variable return based on the performance of a specific asset or index, but also allows investors to short the underlying asset?

Explanation: Exchange-Traded Notes (ETNs) are a type of investment vehicle that allows investors to gain exposure to various assets or indices, while also providing the ability to short the underlying asset. This is in contrast to ETFs, which are designed to track the performance of a specific index or asset, but do not allow shorting.

Q5. A REIT carries a very high debt-to-equity ratio. Which measure should an investor most closely monitor to gauge the risk this leverage creates?

Explanation: High leverage magnifies the burden of interest payments on operating income; the interest coverage ratio (operating income over interest expense) directly measures the REIT's ability to service its debt. The other options do not measure leverage risk.

Q6. A fund manager is considering investing in a Real Estate Investment Trust (REIT) that has a 5-year track record of stable returns, but the manager is concerned about the impact of a potential downturn in the commercial property market on the fund's performance. Which of the following investment strategies would be most appropriate for this fund manager to mitigate this risk?

Explanation: Diversification is a key risk management strategy in investment portfolios, as it helps to reduce exposure to any one particular asset or market. By investing in a mix of REITs and other asset classes, the fund manager can reduce the impact of a downturn in the commercial property market on the fund's performance.

Q7. A mutual fund manager is considering allocating a portion of the fund’s assets to a •10 million investment in a private equity fund that will provide a 10% annual return. However, the investment requires a 20% upfront fee. Which of the following best describes the net effect of the fee on the fund’s returns?

Explanation: The 20% upfront fee reduces the effective return. The investment earns 10% on the initial $10 million. The fee of $2 million reduces the net return. The fee reduces the return by 2% per annum.

Q8. Which of the following investment vehicles is most likely to be affected by the risk of «negative convexity», particularly in a scenario where interest rates rise?

Explanation: A CMO with a high proportion of interest-only payments is most susceptible to negative convexity, as it is more sensitive to changes in interest rates. When interest rates rise, the present value of the future interest payments decreases, leading to a decline in the CMO's value. This is an example of negative convexity, where the return of the investment does not increase at the same rate as the increase in interest rates.

Q9. Which investment vehicle is most likely to be used by a high-net-worth individual seeking to generate current income while also maintaining control over the underlying assets?

Explanation: Real estate investment trusts (REITs) are a type of investment vehicle that allows individuals to invest in real estate without directly owning physical properties. REITs are required to distribute at least 90% of their taxable income to shareholders, making them a popular choice for generating current income. Additionally, REITs are publicly traded, which allows investors to easily buy and sell shares. This makes them a suitable investment option for high-net-worth individuals seeking to generate income while maintaining control over their investments.

Q10. A hedge fund manager is considering investing in a venture capital-backed startup that has already received an initial public offering (IPO) listing on a foreign exchange. Which of the following investment vehicles would be most suitable for this manager to invest in the startup, given the startup's current capital structure?

Explanation: The startup has already received an IPO listing on a foreign exchange, which means it is a publicly traded company. Therefore, the most suitable investment vehicle for the hedge fund manager would be a fund that invests in publicly traded companies listed on a foreign exchange, such as an exchange-traded fund (ETF) or an index fund.

That was just a sample. Sign up to unlock the full question bank with timed tests and certificates.

Sign Up Free
Investment Vehicles MCQ Practice Test | Mind Hustle