Topic 11 - Insurance, Super, Investment Companies

Question 1

Risk Transfer

Answer 1

shifting risk from one party to another

Question 2

Pure Risks

Answer 2

situations with only two outcomes; loss or no loss

Question 3

Objective Risk

Answer 3

deviation between actual losses and expected losses

Question 4

Law of Large Numbers

Answer 4

The higher the amount of people insured, the less deviation between actual and expected losses (like diversification)

Question 5

Underwriting

Answer 5

Classification and selection of insurable risks

Question 6

Co-insurance

Answer 6

Loss-sharing provisions (e.g. paying an excess)

Question 7

Reinsurance

Answer 7

An insurance company insures themself

Question 8

Insurance pricing must be..

Answer 8

Must be:

• able to cover cost of claims
• competitive

Question 9

Life Insurance - Term Life

Answer 9

Over specified time frame

Question 10

Life Insurance - Whole Life

Answer 10

Over whole time frame of life

Question 11

Life Insurance - Business Overhead

Answer 11

Covers business expenses while a key person in running the business is incapacitated

Question 12

General Insurance

Answer 12

Car/home/legal liability

Question 13

Types of Insurance

Answer 13

• Life
• General
• Health

Question 14

Public Unit Trust Fund: Cash Management Trusts

Answer 14

At-call deposits invested in short term government securities

Question 15

Public Unit Trust Fund: Equity Trust

Answer 15

Funds invested in shares with high franking credits

Investors can reduce tax payments

Question 16

Public Unit Trust Fund: Property Trust

Answer 16

Investors can sell their units, but the fund manager does not have to sell any assets

Question 17

Public Unit Trust Fund: Fixed Interest Trust

Answer 17

Usually commonwealth and state government bonds

Question 18

Public Unit Trust Fund: Ethical Funds

Answer 18

exclude investments that may harm the environment

Question 19

Public Unit Trust Fund: Capital Guaranteed Trusts

Answer 19

investors guaranteed to receive initial investment back

Question 20

Accumulation Super Funds/Defined Contribution

Answer 20

Members contribute portion of income

Benefits pay based on fund’s investment performance

Question 21

Defined Benefit Fund

Answer 21

Employer promises a pre-determined final payout for when the employee retires

Question 22

Super Fund: Retail Super

Answer 22

Anyone can join, mid-high costs

Question 23

Super Fund: Industry Super

Answer 23

Low-mid costs

Question 24

Super Fund: Public Sector Super Funds

Answer 24

Usually for government employees, low cost

Question 25

Super Fund: Corporate Super Funds

Answer 25

Arranged by employer for its employees, low-mid costs

Question 26

Super Fund: SMSF

Answer 26

Self managed super fund, highly regulated by ATO

Question 27

Hedge Fund Strategy: Fixed Income Arbitrage

Answer 27

Take short/long bond positions

Profit if yield spreads return to historical levels

Question 28

Hedge Fund Strategy: Index Arbitrage

Answer 28

Buy or sell basket of stocks

Take counter position in an index future

Capture difference due to market ineffiencies

Question 29

Hedge Fund Strategy: Closed-End Fund Arbitrage

Answer 29

Buy/sell basket of stocks that replicates holding of a closed-end mutual fund

Question 30

Hedge Fund Strategy: Convertible Arbitrage

Answer 30

Go long in convertible securities

Simultaneously go short on underlying equities

Work spread between two

Question 31

Hedge Fund Strategy: Risk Arbitrage

Answer 31

Fund managers take long position in stock of company being acquired

Short the stock of the company acquiring