ACTUARY Finance and Economics Flashcards
7 cards from real Actuary Certification practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 ACTUARY Finance and Economics flashcards as text
What is the primary economic justification for government provision of public goods?
Answer: Private markets underprovide public goods due to the free-rider problem
Because public goods are non-excludable and non-rival, private firms cannot charge users effectively, leading to underprovision without government intervention.
Duration of a zero-coupon bond maturing in 10 years equals:
Answer: Exactly 10 years
A zero-coupon bond has no interim cash flows, so its Macaulay duration exactly equals its time to maturity.
The yield curve is said to be 'inverted' when:
Answer: Short-term rates exceed long-term rates
An inverted yield curve occurs when short-term interest rates are higher than long-term rates, often signaling expectations of economic slowdown.
In option pricing, 'theta' measures the sensitivity of the option price to:
Answer: The passage of time
Theta (time decay) measures how much an option loses in value for each day that passes, all else held constant.
Which market structure is characterized by a few large firms and significant barriers to entry?
Answer: Oligopoly
An oligopoly consists of a small number of dominant firms whose pricing and output decisions are interdependent, with high barriers preventing new entrants.
In corporate finance, the Modigliani-Miller theorem (without taxes) states that:
Answer: Capital structure is irrelevant to firm value in perfect markets
MM's capital structure irrelevance proposition shows that in perfect capital markets (no taxes, no bankruptcy costs), firm value is unaffected by financing mix.
The Sharpe ratio is calculated as:
Answer: (Portfolio return - Risk-free rate) / Portfolio standard deviation
The Sharpe ratio measures excess return per unit of total risk, computed as (Rp - Rf) / σp.