James’s Page | Actuary / Fap3-Test

Module 3 Test

You get the largest reduction in risk by spreading your investments across two stocks, when they are perfectly negatively correlated.
Company XYZ has assets of $50 million with a portfolio of assets that includes the following investments: $5 million in the energy sector and $5 million in the oil sector. Company XYZ is exposed to correlation risk.
Within the context of the financial life cycle and human capital theory, real personal income has been shown to depend significantly on age, marital status and level of education.

Incorrect statements:

For educated men, income rises with age until retirement
Married women’s income drops at childbirth, but eventually catches up to that of men with similar levels of education
Non-skilled men’s income peaks in the late forties
Single men generally have higher incomes than married men

Correct statement:

Underwriting is to insurance as plan design is to pensions.
An investment situation in which you can earn money without investing anything is an example of arbitrage.
Investment grade: rated BBB or higher.
The control of a life insurance company’s risks includes:
- I. Risk classification and underwriting for a term life insurance contract.
- II. Selection of assets to match cash flows for existing blocks of annuities.
- III. Reinsurance of whole life insurance contracts above an established limit.
- IV. Purchase of a currency swap for a foreign block of insurance contracts.
The yield curve is usually observed to slope gradually upward as maturity increases.

Correct statements:

Interest rates are expected to increase in the future.
Investors prefer short-term investments over long-term investments because they prefer capital to be more liquid. **Investors prefer present income and are willing to pay increasing interest to bring future income into the present.
Businesses require capital goods to prosper and are willing to pay higher interest to “lock-in” future costs for extended periods.

Incorrect statement:

Investors in long-term bonds are independent of investors in short-term bonds resulting in rates that are independent between the various segments.

With respect to cash-flow-at-risk and earnings-at-risk, the primary advantage of using simulation analysis instead of regression analysis is: simulation analysis incorporates dynamic changes in the external environment, as well as internal management decisions
With respect to asset/liability management, the primary advantage of using stochastic modeling over scenario testing is that stochastic modeling produces a full spectrum of risk exposures with probabilities.
A life insurance company's asset portfolio contains a large number of callable bonds. When measuring the percentage change in value of the asset portfolio for a one percent parallel shift of the yield curve, the actuary reflects the variability in the asset cash flows due to the call options on the bonds. This measure is know as effective duration.
Every actuarial report should include a statement related to which of the following?
- I. The data are sufficient and reliable.
- II. The assumptions are adequate and appropriate.
- III. The methods used are appropriate.