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ICAP PRC-3 Business and Economic Insights study materials
ICAP PRC-3 Business and Economic Insights study resources

ICAP PRC-3 Business and Economic Insights practice questions

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Question 1Business environment and economic concepts

In national income accounting, which component of GDP measures spending by households on goods and services such as food, clothing and appliances?

  1. Net exports of goods and services
  2. Government final consumption expenditure
  3. Gross fixed capital formation
  4. Consumption expenditure Correct answer.

Explanation

Household spending on final goods and services is classified as consumption expenditure, normally the largest component of GDP in most economies. It excludes purchases of capital assets by firms and spending by government bodies.

Question 2Business environment and economic concepts

A central bank raises its policy interest rate sharply. In the short run, which effect on aggregate demand is most consistent with standard macroeconomic theory?

  1. Aggregate demand falls because borrowing costs rise and investment and consumption soften Correct answer.
  2. Aggregate demand rises because higher rates reduce import prices
  3. Aggregate demand is unaffected because interest rates only influence the money supply
  4. Aggregate demand rises because saving becomes more attractive

Explanation

Higher policy rates raise the cost of borrowing, which typically reduces investment and interest-sensitive consumption, so aggregate demand contracts in the short run. The transmission runs through credit conditions and asset prices rather than through direct effects on trade prices.

Question 3Business environment and economic concepts

Which market structure is characterised by many sellers, differentiated products and relatively low barriers to entry?

  1. Monopolistic competition Correct answer.
  2. Perfect competition
  3. Oligopoly
  4. Monopoly

Explanation

Monopolistic competition combines many firms, product differentiation and easy entry, so each firm faces a downward-sloping but highly elastic demand curve. Perfect competition requires homogeneous products, and oligopoly and monopoly involve few or single sellers.

Question 4Business environment and economic concepts

A country's nominal GDP grows by 6% while its GDP deflator rises by 4%. What is the approximate growth in real GDP?

  1. 10%
  2. 1.5%
  3. 6%
  4. 2% Correct answer.

Explanation

Real growth is approximately nominal growth minus inflation, so 6% minus 4% gives about 2%. The deflator measures the price change applied to the whole of domestic output.

Question 5Business environment and economic concepts

Which of the following best describes structural unemployment?

  1. Joblessness caused by seasonal patterns in demand
  2. Joblessness caused by a temporary downturn in the business cycle
  3. Short-term joblessness while workers move between jobs
  4. Joblessness arising from a mismatch between workers' skills or locations and available jobs Correct answer.

Explanation

Structural unemployment reflects lasting mismatches between the skills, locations or attributes of workers and the requirements of available vacancies. It persists even when the economy is growing, unlike cyclical unemployment.

Question 6Business environment and economic concepts

A government cuts income tax rates to stimulate spending. Which transmission channel is most directly engaged?

  1. Fiscal policy operating through disposable income Correct answer.
  2. Monetary policy operating through the exchange rate
  3. Supply-side policy operating through labour productivity
  4. Regulatory policy operating through competition rules

Explanation

An income tax cut raises households' disposable income, which supports consumption and hence aggregate demand. This is a fiscal instrument because it works through taxation and the government budget.

Question 7Business environment and economic concepts

If the exchange rate moves from 1.20 to 1.10 units of domestic currency per unit of foreign currency, what has happened to the domestic currency?

  1. It has appreciated against the foreign currency Correct answer.
  2. It has remained unchanged in real terms
  3. It has been devalued by the central bank
  4. It has depreciated against the foreign currency

Explanation

Fewer units of domestic currency are now needed to buy one unit of foreign currency, so the domestic currency buys more abroad and has appreciated. A depreciation would require more domestic currency per unit of foreign currency.

Question 8Business environment and economic concepts

Which statement best captures the difference between a tariff and a quota?

  1. A tariff is a quantity limit and a quota is a tax on imports
  2. Both restrict exports rather than imports
  3. A tariff is a tax on imported goods and a quota is a quantitative limit on imports Correct answer.
  4. Both are subsidies paid to domestic exporters

Explanation

A tariff is a tax levied on imported goods, raising their domestic price, while a quota caps the quantity that may be imported. Both are trade barriers but operate through price and quantity respectively.

Question 9Business environment and economic concepts

Demand for a product is described as price elastic. Which outcome follows from a small increase in price?

  1. Total revenue rises because quantity falls only slightly
  2. Total revenue is unchanged because quantity is fixed
  3. Total revenue rises because supply expands
  4. Total revenue falls because quantity demanded falls proportionately more Correct answer.

Explanation

With elastic demand, the percentage fall in quantity exceeds the percentage rise in price, so total revenue declines. Revenue rises with a price increase only when demand is inelastic.

Question 10Business environment and economic concepts

Which of the following is counted as part of a country's labour force?

  1. A retiree who has left employment permanently
  2. An unemployed person actively looking for work Correct answer.
  3. A full-time student who is not seeking work
  4. A person unable to work due to long-term illness

Explanation

The labour force comprises people in employment plus those unemployed and actively seeking work. People not working and not seeking work are outside the labour force.

Question 11Business environment and economic concepts

A firm's fixed costs are 200,000 and its variable cost per unit is 30. If it sells 10,000 units at a price of 50 per unit, what is its total profit?

  1. 20,000
  2. 200,000
  3. 0 Correct answer.
  4. 500,000

Explanation

Total revenue is 10,000 times 50, equal to 500,000, and total cost is 200,000 plus 10,000 times 30, equal to 500,000, so profit is zero. The firm is exactly at break-even.

Question 12Business environment and economic concepts

Which measure of inflation typically excludes volatile items such as food and energy to reveal underlying price pressure?

  1. Headline consumer price index
  2. GDP deflator
  3. Producer price index
  4. Core inflation Correct answer.

Explanation

Core inflation strips out volatile components such as food and energy so that underlying trends are easier to see. Headline measures include those components, while the producer price index and deflator measure different price sets.

Question 13Business environment and economic concepts

A central bank lowers the cash reserve ratio for commercial banks. What is the most likely intended effect?

  1. To expand bank lending capacity and support money growth Correct answer.
  2. To reduce the volume of bank lending and tighten credit
  3. To reduce government borrowing requirements
  4. To raise the exchange rate directly

Explanation

A lower reserve requirement frees part of banks' deposits for lending, expanding credit capacity and supporting money supply growth. It is an expansionary monetary tool rather than a fiscal one.

Question 14Business environment and economic concepts

Which of the following describes a progressive tax system?

  1. The average tax rate falls as income rises
  2. The average tax rate rises as income rises Correct answer.
  3. Everyone pays the same percentage of income
  4. Everyone pays the same absolute amount of tax

Explanation

In a progressive system the average tax rate increases with income, so higher earners pay a larger share. A flat percentage is proportional, and a falling average rate is regressive.

Question 15Business environment and economic concepts

A country records exports of 400 billion, imports of 450 billion, net income from abroad of 20 billion and net transfers of 5 billion. What is its current account balance?

  1. -50 billion
  2. -25 billion Correct answer.
  3. 25 billion
  4. 75 billion

Explanation

The current account combines the goods and services balance with net income and net transfers, so -50 plus 20 plus 5 equals -25 billion. The trade deficit is partly offset by income and transfer inflows.

Question 16Business environment and economic concepts

Which factor would shift the market supply curve for a good to the left?

  1. A fall in the price of a key input
  2. A technological improvement in production
  3. An increase in the number of producers
  4. A rise in the wage rate paid to workers Correct answer.

Explanation

Higher wages raise production costs, so producers offer less at every price and the supply curve shifts left. The other options lower costs or add capacity and shift supply right.

Question 17Business environment and economic concepts

Which of the following is a defining feature of a public good?

  1. It is produced only by state-owned enterprises
  2. It is always provided free of charge to users
  3. It is non-rival and non-excludable in consumption Correct answer.
  4. It is subject to price regulation by a competition authority

Explanation

Public goods are non-rival, meaning one person's use does not reduce availability to others, and non-excludable, meaning users cannot easily be prevented from consuming them. Ownership and pricing arrangements are separate questions.

Question 18Business environment and economic concepts

A monopoly faces a downward-sloping demand curve. Compared with a competitive market, what is the standard prediction for price and output?

  1. Higher price and higher output
  2. Lower price and higher output
  3. Higher price and lower output Correct answer.
  4. Lower price and lower output

Explanation

A monopolist restricts output to raise price above marginal cost, so relative to competition the typical outcome is a higher price and lower quantity. This restriction creates the deadweight loss associated with market power.

Question 19Business environment and economic concepts

Which of the following best explains why GDP per capita can rise while median household income stagnates?

  1. Median income is measured in nominal terms only
  2. GDP per capita always overstates population growth
  3. GDP excludes all income earned by households
  4. Gains in output may be concentrated among high earners or retained by firms Correct answer.

Explanation

GDP per capita is an average, so it can grow even when gains accrue disproportionately to a small group or remain as corporate profits. Median income captures the middle household and may therefore diverge from the average.

Question 20Business environment and economic concepts

A firm in a perfectly competitive market is a price taker. What does this imply about its marginal revenue?

  1. Marginal revenue exceeds the market price
  2. Marginal revenue equals the market price Correct answer.
  3. Marginal revenue is zero at all output levels
  4. Marginal revenue falls as output rises

Explanation

Because the firm can sell any quantity at the market price, each extra unit adds exactly the price to revenue, so marginal revenue equals price. For a firm facing downward-sloping demand, marginal revenue would be below price.

Question 21Business environment and economic concepts

Which of the following is an example of an automatic stabiliser in fiscal policy?

  1. A discretionary cut in the policy interest rate
  2. A central bank bond purchase programme
  3. A one-off infrastructure spending package approved by parliament
  4. Progressive income tax that collects less when incomes fall Correct answer.

Explanation

Automatic stabilisers operate without new policy decisions, so progressive taxes and unemployment benefits cushion the cycle as incomes and employment change. Discretionary measures require deliberate action.

Question 22Business environment and economic concepts

If a currency depreciates and the Marshall-Lerner condition holds, what happens to the trade balance over time?

  1. It improves, after a possible initial deterioration Correct answer.
  2. It is unchanged because volumes do not adjust
  3. It improves only if imports are banned
  4. It worsens permanently

Explanation

When the sum of the price elasticities of export and import demand exceeds one, a depreciation eventually improves the trade balance. Adjustment takes time, which can produce a short-run deterioration known as the J-curve.

Question 23Business environment and economic concepts

Which of the following best describes the role of an industry regulator in a privatised utility market?

  1. Setting prices or price caps and enforcing service standards Correct answer.
  2. Owning the utility's shares on behalf of the state
  3. Setting the utility's marketing strategy
  4. Determining the utility's dividend policy

Explanation

Regulators in natural monopoly sectors typically control prices or price caps and enforce service quality to protect consumers where competition is limited. Commercial decisions such as marketing and dividends remain with the firm.

Question 24Business environment and economic concepts

A government introduces a minimum wage above the market-clearing wage. According to standard competitive labour market analysis, what is the likely result?

  1. A fall in the wage paid to workers
  2. An increase in the quantity of labour demanded
  3. An immediate rise in labour productivity
  4. A surplus of labour, with some workers unable to find jobs Correct answer.

Explanation

A binding minimum wage above equilibrium raises the price of labour, reducing the quantity demanded and increasing the quantity supplied, producing a surplus of labour. This is the textbook competitive-market prediction, though real labour markets are more complex.

Question 25Business environment and economic concepts

Which of the following is the best example of a supply-side policy measure?

  1. Raising tariffs to protect domestic producers
  2. Cutting the policy interest rate to boost demand
  3. Raising transfer payments to unemployed households
  4. Increasing spending on vocational training to improve workforce skills Correct answer.

Explanation

Supply-side policies aim to raise the productive capacity of the economy, and skills training improves labour quality and potential output. Transfer payments and interest-rate cuts act mainly on demand, while tariffs distort trade.

Question 26Business environment and economic concepts

An economy's nominal GDP rises by 6% in a year while the GDP deflator rises by 4% over the same period. What is the approximate growth rate of real GDP?

  1. About 6%
  2. About 4%
  3. About 10%
  4. About 2% Correct answer.

Explanation

Real GDP growth is approximated by subtracting the change in the price deflator from the change in nominal GDP, since nominal growth bundles together volume and price movements. Here 6% minus 4% leaves roughly 2% of genuine output growth. The precise calculation divides nominal GDP by the deflator, but the subtraction gives a close approximation for small changes.

Question 27Business environment and economic concepts

Which situation best illustrates the economic problem of scarcity as it applies to a business deciding what to produce?

  1. A firm's share price rises following the announcement of a new chief executive.
  2. A firm uses limited factory capacity to make one product line, forgoing output of another. Correct answer.
  3. A firm borrows from a bank to cover a temporary shortfall in its cash flow.
  4. A firm's sales revenue exceeds its total costs in a profitable financial year.

Explanation

Scarcity means resources such as capital, labour and factory capacity are finite, so committing them to one use means giving up another, which is the essence of opportunity cost. The capacity trade-off between product lines captures that constraint directly. Profitability, borrowing and share-price movements describe financial outcomes rather than the allocation of limited resources among competing uses.

Question 28Business environment and economic concepts

A country's central bank raises its policy interest rate sharply. In the short run, which combination of effects is most consistent with standard macroeconomic transmission?

  1. Domestic currency depreciates and domestic demand cools through lower import prices
  2. Domestic currency depreciates and domestic demand accelerates as saving becomes more attractive
  3. Domestic currency appreciates and domestic demand accelerates because credit becomes cheaper
  4. Domestic currency appreciates and domestic demand cools through higher borrowing costs Correct answer.

Explanation

Higher policy rates attract capital inflows seeking better returns, which tends to strengthen the currency, while raising the cost of credit for firms and households. Both channels work to restrain aggregate demand and ease inflationary pressure. The currency and demand effects therefore move together in the direction of tightening, not in opposite directions.

Question 29Business environment and economic concepts

Two firms consider a joint venture. Each must decide whether to invest heavily or stay small, and the payoff to each depends on the other's choice. Which analytical tool is designed specifically for this kind of interdependent decision?

  1. A break-even chart plotting total cost against output
  2. A demand and supply diagram for a competitive market
  3. A payoff matrix analysed as a strategic game Correct answer.
  4. A production possibility frontier for the economy

Explanation

Game theory models situations where each party's best choice depends on what the other party does, and a payoff matrix lays out the outcomes for each combination of strategies. Competitive market diagrams, break-even charts and production possibility frontiers assume atomistic or single-agent decisions and do not capture strategic interdependence between named rivals.

Question 30Business environment and economic concepts

A government removes a binding price ceiling on rental housing, allowing rents to rise to the market-clearing level. Assuming upward-sloping supply and downward-sloping demand, which outcome is the standard prediction?

  1. Rents settle below the former ceiling because landlords compete for tenants
  2. The quantity of rental housing supplied falls and a surplus of units emerges
  3. The quantity of rental housing supplied increases and the previous shortage is eliminated Correct answer.
  4. The quantity demanded rises while the quantity supplied stays unchanged

Explanation

A binding price ceiling holds the price below equilibrium, so quantity demanded exceeds quantity supplied and a shortage persists. Removing the ceiling lets price rise toward equilibrium, which draws additional supply into the market and trims excess demand until the two sides balance. The predicted result is a larger supplied quantity and the disappearance of the shortage.

Question 31Financial markets and instruments

A UK government bond pays a fixed coupon of 4% on a nominal value of £100. If the bond's clean price falls to £90, what is its current yield?

  1. 4.00%
  2. 3.60%
  3. 5.00%
  4. 4.44% Correct answer.

Explanation

Current yield equals the annual coupon divided by the market price, so £4 ÷ £90 = 4.44%. It ignores any capital gain or loss to redemption, which is why yield to maturity is usually the more complete measure.

Question 32Financial markets and instruments

Which characteristic most clearly distinguishes a money market instrument from a capital market instrument?

  1. The issuer is always a government rather than a company
  2. The instrument pays no interest to the holder
  3. The original maturity is one year or less Correct answer.
  4. The instrument is traded only on a recognised exchange

Explanation

Money market instruments such as Treasury bills and commercial paper have original maturities of one year or less, while capital market instruments have longer maturities. Issuer type and exchange listing do not define the boundary between the two markets.

Question 33Financial markets and instruments

An investor buys shares in a company at 250p and later sells them at 300p after receiving a dividend of 10p per share. What is the total return on the investment?

  1. 24.0% Correct answer.
  2. 20.0%
  3. 16.7%
  4. 12.0%

Explanation

Total return combines the capital gain of 50p with the 10p dividend, giving 60p on a 250p outlay, or 24%. Ignoring the dividend understates the return actually earned by the holder.

Question 34Financial markets and instruments

Which statement best describes the role of a market maker in an equity order book?

  1. They continuously quote bid and offer prices and stand ready to trade Correct answer.
  2. They set the official closing price for each listed security
  3. They guarantee that issuers will always be able to raise new capital
  4. They act as the settlement agent for failed trades

Explanation

A market maker provides liquidity by quoting two-way prices and trading on those quotes when approached. This narrows spreads and allows other participants to transact without waiting for a natural counterparty.

Question 35Financial markets and instruments

A bond has a modified duration of 6. If its yield rises by 0.5 percentage points, what is the approximate percentage change in its price?

  1. A rise of about 3%
  2. A fall of about 3% Correct answer.
  3. A fall of about 6%
  4. A fall of about 0.5%

Explanation

The duration-based estimate of price change is minus modified duration multiplied by the change in yield, so −6 × 0.005 = −3%. The relationship is inverse: rising yields reduce bond prices, and the estimate is only approximate because convexity is ignored.

Question 36Financial markets and instruments

An investor holds a convertible bond. Which combination of exposures does this instrument primarily provide?

  1. Inflation protection plus a commodity price link
  2. Fixed income only, with no equity exposure
  3. Corporate credit exposure plus an embedded option on the issuer's shares Correct answer.
  4. Equity exposure only, with no income

Explanation

A convertible bond pays coupon interest and exposes the holder to the issuer's credit, while the conversion feature gives an option to exchange it for shares. Its value therefore blends bond and equity characteristics.

Question 37Financial markets and instruments

A company announces a 2-for-1 share split. What is the most likely immediate effect on the share price and the number of shares in issue?

  1. Both the price and the number of shares stay unchanged
  2. The price halves and the number of shares doubles Correct answer.
  3. The price halves and the number of shares stays unchanged
  4. The price doubles and the number of shares halves

Explanation

A split increases the number of shares proportionally while reducing the price per share, leaving the total market value unchanged in the absence of other news. No economic value is created or destroyed by the mechanical adjustment.

Question 38Financial markets and instruments

Which measure is the standard estimate of the sensitivity of a share's return to movements in the overall market?

  1. Standard deviation
  2. Sharpe ratio
  3. Correlation coefficient
  4. Beta Correct answer.

Explanation

Beta measures how a security's returns co-move with the market return, so a beta above one implies amplified market sensitivity. Standard deviation and correlation describe risk and co-movement but not sensitivity in the same scaled way.

Question 39Financial markets and instruments

An investor expects interest rates to fall sharply over the next year and wants to profit from that view using government bonds. Which position is most consistent with the view?

  1. Sell long-dated bonds and buy short-dated bonds
  2. Buy long-dated bonds and sell short-dated bonds Correct answer.
  3. Buy short-dated bonds only
  4. Sell bonds and hold cash until rates stabilise

Explanation

Falling yields raise bond prices, and long-dated bonds have higher duration so they gain more. Buying long-dated and selling short-dated bonds therefore expresses a rate-cut view with positive duration exposure.

Question 40Financial markets and instruments

What is the primary economic function of an initial public offering in the primary market?

  1. To allow existing shareholders to hedge their positions using derivatives
  2. To raise new capital for the issuer and create a listed market for its shares Correct answer.
  3. To guarantee a minimum dividend to new investors
  4. To set the daily reference price used by market makers

Explanation

An IPO brings a company's shares to a public market and typically raises fresh capital for the issuer, while also creating secondary market liquidity. It does not by itself guarantee returns or hedge existing holders.

Question 41Financial markets and instruments

A portfolio has an expected return of 8% and a standard deviation of 12%. The risk-free rate is 2%. What is the portfolio's Sharpe ratio?

  1. 0.50 Correct answer.
  2. 0.17
  3. 0.08
  4. 0.67

Explanation

The Sharpe ratio is the excess return over the risk-free rate divided by standard deviation, so (8% − 2%) ÷ 12% = 0.50. It expresses how much excess return is earned per unit of total risk.

Question 42Financial markets and instruments

Which feature most accurately describes the payoff of a standard put option held by an investor?

  1. The right to sell the underlying at a fixed price Correct answer.
  2. The obligation to sell the underlying at a fixed price
  3. The obligation to buy the underlying at a fixed price
  4. The right to buy the underlying at a fixed price

Explanation

A put gives its holder the right, but not the obligation, to sell the underlying at the strike price. The holder exercises only when the market price is below the strike, so the payoff is protected on the downside.

Question 43Financial markets and instruments

A company's shares trade at £5.00 and it announces a dividend of 20p per share with the ex-dividend date tomorrow. All else equal, what should the opening price be on the ex-dividend date?

  1. £5.00
  2. £5.20
  3. £4.80 Correct answer.
  4. £4.00

Explanation

On the ex-dividend date new buyers no longer receive the declared dividend, so the share price should fall by roughly the dividend amount, giving £4.80. The adjustment reflects the transfer of value from the company to entitled shareholders.

Question 44Financial markets and instruments

Which statement best explains why a central bank's policy rate affects short-dated money market yields?

  1. Policy rates anchor the cost of overnight and very short-term funding Correct answer.
  2. Policy rates determine the credit rating of commercial paper issuers
  3. Policy rates fix the exchange rate for the domestic currency
  4. Policy rates directly set the coupon on all outstanding government bonds

Explanation

The policy rate sets the price of central bank reserves and therefore anchors very short-term funding costs, which feed into bill and commercial paper yields. Longer-dated yields depend more on expectations and term premia.

Question 45Financial markets and instruments

An investor holds a UK gilt and a US Treasury bond of equal maturity and coupon. The investor notes that the gilt yields more. Which factor could plausibly explain the yield difference?

  1. The US Treasury bond is always less liquid than the gilt
  2. The gilt must have a shorter maturity than stated
  3. The gilt is denominated in a different currency, so investors demand a currency and inflation risk premium Correct answer.
  4. The gilt has no credit risk while the Treasury does

Explanation

Cross-market yield comparisons must account for currency, inflation and liquidity differences, which investors price as premia. Both issuers are highly rated, so the gap is unlikely to reflect credit quality alone.

Question 46Financial markets and instruments

Which of the following best describes a repo transaction?

  1. An outright purchase of equities funded by a long-term bond issue
  2. A loan of shares with no collateral and no return of the securities
  3. A sale of securities combined with an agreement to repurchase them at a later date at a set price Correct answer.
  4. A swap of fixed for floating interest payments with no exchange of principal

Explanation

A repo is economically a secured loan: securities are sold and repurchased later, with the price difference reflecting the financing rate. It is a core money market tool for short-term collateralised funding.

Question 47Financial markets and instruments

An investor wants exposure to a broad equity index but holds only a small sum and wishes to avoid futures margining. Which instrument is most suitable?

  1. A single-name equity option
  2. A currency forward
  3. An exchange-traded fund tracking the index Correct answer.
  4. A corporate bond issued by an index constituent

Explanation

An index-tracking ETF provides diversified exposure in small denominations and trades like a share without futures margin requirements. Single-name options and bonds give concentrated or non-equity exposure.

Question 48Financial markets and instruments

A bond trades at a price above its face value. Which statement about its yield to maturity is correct?

  1. The yield to maturity equals the coupon rate
  2. The yield to maturity is always zero
  3. The yield to maturity is below the coupon rate Correct answer.
  4. The yield to maturity is above the coupon rate

Explanation

When a bond trades at a premium, the holder receives coupons above the market rate but will suffer a capital loss to redemption, so the yield to maturity is below the coupon. At par the two are equal; at a discount the yield exceeds the coupon.

Question 49Financial markets and instruments

A trader buys a futures contract at 100 and the exchange sets an initial margin of £2,000 with a maintenance margin of £1,500. The contract size is £10 per index point. If the futures price falls to 95, what happens to the trader's margin account?

  1. The position is automatically closed at a profit
  2. A margin call is triggered for £2,000
  3. No action is required because the loss is below the maintenance level
  4. A margin call is triggered for £1,500 Correct answer.

Explanation

The loss is 5 points × £10 = £50, so the account falls from £2,000 to £1,950, which is above the £1,500 maintenance level. No call is triggered at this point, so the correct answer is that no action is required.

Question 50Financial markets and instruments

An investor holds a portfolio with a beta of 1.4 and expects the market to fall by 10%. Assuming the risk-free rate is unchanged, what is the approximate expected portfolio return?

  1. −10%
  2. −4%
  3. +14%
  4. −14% Correct answer.

Explanation

Using the capital asset pricing model in excess-return form, the portfolio moves by beta times the market move, so 1.4 × −10% = −14%. The higher beta amplifies both gains and losses relative to the market.