Answers to Quiz

The correct answers shown in red, the wrong answers are in plain text, comments are in green and the marking system is in blue.

1. What is a gilt?

An easy one to start.

(a) a corporate bond

(b) a government bond

(c) a type of gold

(d) the expression on your dog’s face when it pinches food off the kitchen table.

Marks:           One point for the correct answer.

2. Place in order the following economies from highest to lowest in respect of the percentages of their GDP (gross domestic product, a measure of their economic output) that are imports and exports.

UK, US, Eurozone and China.

Eurozone, UK, China and US.

The Eurozone has the highest dependency on exports and imports and the US the least. The US economy is very domestically focused and consumer oriented.

Marks:           Two points for the exact correct order.

3. Your portfolio rises in value from £159,320 to £197,500. What is the percentage rise to two decimal points?

The answer is 23.96% to two decimal places. The workings are as follows:

First deduct the end value from the starting value, £197,500 – £159,320 = £38,180. That is the gain in cash terms.

To calculate the percentage gain, you need to express the cash gain as a percentage of the starting value i.e. 

       £38,180

      ———–    x 100% = 23.96%.

      £159,320          

Marks:           One point for the correct answer.

4. Which of the following statements about investment trusts are true? There may be more than one.

(a) They are open ended meaning the fund manager can create and redeem shares 

ITs are closed end funds with a limited number of shares in issue. Unit trusts and OEICs are open ended. The closed end structure of investment trusts means the value of the underlying assets per share may trade at a discount or premium to the share price.                                                                                                                                     

(b) They can borrow to invest

Unlike unit trusts and OEICs. Borrowing to invest means ITs magnify returns and losses.

(c) Their shares are listed and traded on a stock exchange

This is exactly the same as for companies such as BP, HSBC and Diageo.

(d) They are required to distribute all income to investors as it arises

No. They can retain 15% for distribution at a later stage. This enables investment trusts to smooth distributions or increase dividends year on year.

(e) They are good for holding illiquid assets.

This is a feature of closed end funds. Assets do not have to be sold to meet investor demand to sell out unlike with OEICs and unit trusts.

Marks:           One point for each correct answer, maximum  of three. Deduct half a point for each wrong answer but your overall score for the question cannot be less than zero.

5. Which of the following are considered safe haven assets during periods of economic and market stress? Again there may be more than one.

(a) Swiss Franc

(b) Gold

(c) Bitcoin

(d) Japanese Yen

(e) High yield corporate bonds

(f) Shares in travel companies and airlines

(g) US Treasuries.

Marks:           One point for each correct answer, maximum  of four. Deduct half a point for each wrong answer but your overall score for the question cannot be less than zero.

6. Which statements are generally true if Sterling falls in value against other developed market currencies such as the dollar, yen and Euro.

(a) The UK imports inflation

(b) UK exporters benefit in selling goods and services abroad

(c) Foreign holidays are cheaper for Brits

(d) Petrol prices are likely to fall

(e) The FTSE 100 index is likely to rise.                                    

Overseas earnings made in foreign currencies are boosted when repatriated to Sterling. Around 70% of FTSE 100 companies’ earnings are from overseas.

Marks:           One point for each correct answer, maximum  of three. Deduct half a point for each wrong answer but your overall score for the question cannot be less than zero.

7. Which of the following statements about smaller companies are generally true?

(a) They are more likely to suffer more during recessions and economic downturns than larger companies

(b) In the long term smaller companies outperform larger companies

(c) Smaller companies do not pay dividends

Whilst some do not, notably in the early stage when a company is not in profit, many listed smaller companies do pay dividends.

(d) Smaller companies are primarily exposed to the domestic, consumer economy

(e) Smaller companies funds are best managed passively using index tracking strategies.                         

Active fund management is best due to the lack of analyst research and price anomalies.

Marks:           One point for each correct answer, maximum  of three. Deduct half a point for each wrong answer but your overall score for the question cannot be less than zero.

8. Which of the following are normally positively correlated?

(a) Inflation and interest rates

(b) Interest rates and corporate bond prices     

When interest rates rise, bond prices fall

(c) Equities and bonds                                                                                         

A tricky one, sometimes they are, sometimes they are not, depending on market conditions. Overall though a positive correlation cannot be claimed.

(d) Unemployment and wage growth                                                            

They are negatively correlated.

(e) The win ratio of Barnsley football club and the UK economy.           

However if the UK economy improves with falling unemployment and wage growth attendances at football matches might go up.

Marks:           One point for the correct answer. Deduct half a point for each wrong answer but your overall score for the question cannot be less than zero.

9. Place in order the following equity markets in terms of the least to most expensive based on forward price to earnings ratios at 30/9/19

UK, US, Europe (ex-UK), Emerging Markets and Japan.

Emerging Markets, UK, Japan, Europe (ex-UK), US

Marks:           Two points for the exact correct order.

10. An individual has earned income of £18,000 in 2019/20. How much tax will he pay on £17,000 of dividends he receives from non-ISA investments in that tax year?

The answer is £1,125.

In 2019/20 the individual has a £2,000 dividend tax allowance. All of his personal allowance of £12,500 is used up by his salary and he is a basic rate taxpayer. This means £15,000 of dividends are taxable at 7.5% i.e. £15,000 x 0.075 = £1,125.

Marks:           Two points for the correct answer.

11. Someone invested £20,000 in a fund outside an ISA on 1/10/17. Two years later the investment is worth £27,000. The investor sells £6,000. How much is the realised capital gain for tax purposes?

The answer is £1,555.56.

The £6,000 sold has to be apportioned between a disposal of original investment and realised gain. The amount of original capital in the £6,000  is calculated as a proportion

£20,000

———           X          £6,000 = £4,444.44. 

£27,000

The gain is £6,000 – £4,444.44 = £1,555.56.

The calculation assumes for simplicity there is no dividend re-investment.

Marks: Two points for the correct answer.

12. Which of the following investments always pay returns free of income and/or capital gains tax to investors?

(a) Stocks and shares ISAs

(b) Premium Bonds

(c)  Unit Trusts

(d) Venture Capital Trusts

(e) Structured Products

(f) NS&I Income Bonds.

Marks:           One point for each correct answer, maximum  of three. Deduct half a point for each wrong answer but your overall score for the question cannot be less than zero.

There are a maximum of 27 marks.

0-5                  Brushing up required

5-10               Could do better

10-15             Pretty good

15-20             Good

20-26             Excellent

27                   You could be a very good financial adviser

Nothing in this test is intended as personal advice or a financial recommendation, for example to invest in safe haven assets and tax free investments.