Do you know financial market basics? Let us have a look!

Test your financial knowledge

Co-movements in asset prices…

Bonds and the believe we don't need them…

Fixed Income and inflation…

Evaluate your financial knowledge to make smarter investment decisions with our interactive assessment tool.

Financial Knowledge Assessment | Smarter Investing Starts Here

Which of the following statements is correct?

We have heard by now something about market volatility but what about the word correlation?

Why should we still hold low or negative yielding sovereign bonds in portfolios?

Investing into bonds is important for every portfolio but is often neglected given current low or even negative interest rates.

"Please consider the results when judging on your financial knowledge"

"If knowledge is not put into practice, it does not benefit one."   (Muhammad Tahir-ul-Qadri)

Result

The questions are not difficult, and there is not always a clear right or wrong. For a fully correct answer you will receive 10 points, for semi-correct answers 5 or 2.5.

This section will help us to understand your experience and knowledge of financial markets.

What was the largest loss for US equities over one single year since 1980?

Equity markets are a wealth generator over time, but in the short run they can display tremendous risks too, which is often ignored by investor. 

How long did it take to recover the entire losses?

It may surprise you but US equities lost within just one single year during the great financial crisis more than 40% in value! The entire losses from peak-to-trough over 16 month were even higher and around 50%. But market have recovered.

Equity market performance is often related to earnings and earnings surprises.

The price of government bonds’ increases generally over time if:

Traditional investments include not only equities but also fixed income securities (bonds) that are sensitive to changes in interest rates.

Which situation usually contributes to sharp market corrections?

Sometimes market corrections become excessive. We call this “market panic" or "crash”. 

When ranking financial investments along risk, how would you rank the following assets (from lowest risk to highest risk).

Financial assets have different risk characteristics and as such can experience lesser or stronger market moves.

What do we mean when we talk about volatility in markets?

In media we often hear experts talking about market “volatility” as if everybody understands fully what is means.

How does the life-length of a bond impact its price sensitivity (risk)?

Fixed income securities usually come with different maturities. Government Bills have maturities up to one year, Notes up to 10 years and Bonds everything beyond. 

The largest market correction in the most recent history took place during the great financial crisis between November 2007 and February 2009. During this period, US equities dropped by more than 40% within a year.

Although global equity markets stabilized after around +/- 16 months, the road to recovery was much slower. Overall, it took the US market 37 months (between the bottom in February 2009 and March 2012) to recover the losses.

Changes in equity prices can be decomposed into earnings growth and changes in the price-to-earnings ratio. Earnings are hence often at the center of attention to market participants.

Purchasing a bond is an agreement to pay you interest rates over the lifetime of the security. If interests increase, you could have lent your money for higher interests, making your previous purchase less valuable => bond prices fall.

Leverage is believed to be a major contributor that turns market corrections into crashes. Such borrowed investments are liquidated first if markets fall, increasing the likelihood of a serious crash if many investors liquidate at the same time.

The higher the paid premia (the reward), the higher the risk of the financial asset. Equities carry the highest risk premia and hence the highest risk. Cash is assumed to carry no or extraordinarily little premia making it rank last.

Volatility is often used to describe market sentiment regarding current uncertainty. Although expected volatility is usually increasing when markets fall, it is more correct to use volatility as expression on how strong markets swing.

A 30-year Government Bond will have a much higher sensitivity towards changes in interest rates, while a one-year Government Bill will hardly change with moving interest rates. Hence, longer dated bonds carry more price risk.

Correlation is a measure of the relationship between two series (e.g. asset prices). In the case of two assets, it describes how much both move together. Assets that move in parallel are called "highly correlated assets".

Combining negatively correlated assets like equities and bonds into a portfolio allows taking more market risk. This effect of utilizing more efficiently your risk budget is called diversification. It is an important element of risk management.

The riskiness/uncertainty of your income is an important part of our “life cycle” portfolio approach and predominantly influenced by the sector you work in. By knowing the source of your income, we can treat it as an asset (human capital) when driving your optimal investment strategy.

Why is this question asked?

We ask for your income range and the amount of household savings to derive a risk tolerance score, that is part of the regulatory suitability analysis. These two elements help us to gauge your risk capacity and form the basis for the “Risk Tolerance” test.

 The riskiness/uncertainty of your income is an important part of our “life cycle” portfolio approach and predominantly influenced by the sector you work in. By knowing the source of your income, we can treat it as an asset (human capital) when driving your optimal investment strategy.

  We ask for your income range and the amount of household savings to derive a risk tolerance score, that is part of the regulatory suitability analysis. These two elements help us to gauge your risk capacity and form the basis for the “Risk Tolerance” test.