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
Which macroeconomic concept describes the total spending on a country's goods and services in a given period?
Answer: Aggregate demand
Aggregate demand (AD) is the total demand for final goods and services in an economy, composed of consumption, investment, government spending, and net exports.
An actuary is analyzing a pension fund's liabilities. The surplus is most at risk from parallel upward shifts in interest rates when:
Answer: Liability duration exceeds asset duration
When liability duration exceeds asset duration, rising rates reduce liability PV less than asset PV, squeezing the surplus.
Price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in:
Answer: Price
Own-price elasticity of demand = %ΔQd / %ΔP, measuring how responsive quantity demanded is to a change in the good's own price.
In the Black-Scholes model, which input directly measures the market's expectation of future price fluctuations of the underlying asset?
Answer: Implied volatility
Implied volatility is backed out from observed option prices using the Black-Scholes formula and reflects the market's forward-looking volatility expectation.
What does the convexity of a bond measure?
Answer: The curvature in the price-yield relationship, improving duration estimates for large rate changes
Convexity captures the second-order (curvature) effect in the price-yield relationship, correcting for duration's linear approximation error when rates move significantly.
Purchasing Power Parity (PPP) theory suggests that exchange rates should adjust so that:
Answer: Identical goods have the same price across countries when expressed in a common currency
PPP holds that arbitrage in goods markets forces exchange rates to equalize the price of identical baskets of goods across countries.
Which risk is best described as the uncertainty in the timing and amount of cash flows from reinvesting coupon payments?
Answer: Reinvestment risk
Reinvestment risk is the possibility that interim coupon payments will be reinvested at rates different from the bond's yield to maturity, affecting total return.