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R02 - 2023 > 10 - The principles of investment > Flashcards

10 - The principles of investment Flashcards

1
Q

What do pragramits use to asset allocation

A

Long run average rate of returns from relevant asset calasses

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2
Q

What does theoretical approach to asset allocation

A

Masthematical analysis to obtain risk-return trade off given volatility. (uses historic volatility)
Correlation

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3
Q

What type of judgement do pgramatists use

A

forward looking

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4
Q

What is efficient frontier

A

A set of portfolios that have maximum rate of returns for every given level of risk

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5
Q

What are some assumptions of optimisation models

A

Risk
Historic data
Forecasts
Cost
Implementation

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6
Q

What is stochastic modelling?

A

Models the outcomes of random changes in variables, generates probabilistic assessment

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7
Q

What is an example of stochastic modelling

A

Inflation
Interest rates

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8
Q

When is strategic asset allocation for

A

Long term

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9
Q

How can an advisor create a portfolio once a risk profile has been administered

A

In order of complexity

Historic data
Adjusted historic data
Stochastic

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10
Q

What must an advisor do when creating a porfolio

A

Explain why chosen portfolio matches clients requirements

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11
Q

What is top-down investment management?

A

Determine asset allocation within each world major investment region

Choose sector weightings

Select stock

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12
Q

What is bottom up investment management

A

Managers select stocks based on own criteria

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13
Q

What are the four fund management styles

A

Value
GAARP
Momentum
Contraianism

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14
Q

What is value fund management style

A

Use analysis to identify under-valued businesses

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15
Q

What type of funds typically adopt a ‘value’ management style?

A

Equity income; income & growth

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16
Q

What is the ‘GAARP’ fund management style?

A

Find reasonably-priced areas with growth potential

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17
Q

What type of funds typically adopt a ‘GAARP’ management style?

A

Active growth

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18
Q

What is the ‘momentum’ fund management style?

A

Relies on tendency for both good + bad performance to persist

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19
Q

What is an example of ‘momentum’ fund management?

A

Sector rotation: tendency of sectors to do well at different points in economic cycle

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20
Q

What is the ‘contrarianism’ fund management style?

A

Buck trends to achieve high returns, taking advantage of the majority’s excessive optimism/pessimism

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21
Q

Q
What type of funds typically adopt a ‘contrarian’ management style?

A

Hedge funds

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22
Q

What is beta?

A

Market related return

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23
Q

What is alpha

A

Specific return independent of market

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24
Q

What is overlay strategy

A

Core portfolio is held and derivatives are used to alter currency

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25
Q

What is a structured product?

A

Uses derivatives to limit capital risk in return for a lock-in period of up to 6 years

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26
Q

For a structured product, what is ‘hard protection’?

A

A given return is guaranteed

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27
Q

For a structured product, what is ‘soft protection’?

A

A
Capital is at risk if a certain threshold is breached e.g. if the index drops 50%

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28
Q

Q
What type of risk is involved with structured products?

A

Counterparty i.e. failure of the institution from which derivatives are bought

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29
Q

What are the charges of funds

A

AMC
On going charge figure
Performance fee
Total cost of ownership

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30
Q

How many components should cost be separated into

A

4

31
Q

What are the components of costs with investments

A

Ongoing charges for fund
one off fees
Incidental fees
Transaction fees

32
Q

What does the regulation of funds mean for investors if management group falls

A

Investors have no monetary loss - independent custodian holds asset

33
Q

Q
What detail does the FCA require if a fund advertises its past performance?

A

Discrete year-by-year performance

34
Q

What is reputation based on

A

Performance
Consistency on strategy

35
Q

What criteria should be considered when choosing investment manager

A

Relevant experience
Structure and style of investment
Size, access to resources
Quality of staff
cost

36
Q

Which are more volatile, open or closed-ended funds?

A

Closed, as they may be geared & the premium/discount to NAV can change

37
Q

Which are better suited to illiquid asset classes, open or closed-ended funds?

A

Closed, as it may not be possible to sell illiquid assets in volumes required to meet redemptions in open-ended funds

38
Q

What is one place to identify companies with strong ESG practices?

A

FTSE4Good Index Series

39
Q

how are tracker funds structured?

A

Usually ETFs but can be investment trusts, unit trusts or OEICs

40
Q

What are the two ways an ETF can track an index?

A

‘Physically’ (by holding stocks) or ‘synthetically’ (using derivatives)

41
Q

What are the two aspects of passive fund selection

A

Index selection
Structure

42
Q

What are the two factors when choosing tax wrapper

A

Client individual tax and financial circumstances
Underlying assets held in tax wrapper

43
Q

What are the main tax wrappers to consider?

A

Collective investments (OEICs etc.)
ISAs
Personal pensions / SIPPS
Life assurance bonds (UK/offshore)

44
Q

Who benefits the most, relatively, from tax relief on pension contribitons?

A

Higher & additional rate taxpayer

45
Q

What is the annual exempt amount for gains - investment

A

£6,000

46
Q

What are collectives tax wrapper?

A

Tax efficient hold equity-based investments

-Dividend tax
Gains subject to CGT (When units or shares are sold)

47
Q

What is an advantage of personal pension

A

PCLS aged 55 over - draw freely subject to marginal rate of income tax

48
Q

When is tax free access of investment of life policies

A

after 7.5 years from inception (75% of 10 years for example)

49
Q

What is maximum contribution of life policies

A

£3,600 a year

50
Q

What does SIPP stand for?

A

Self-invested personal pension

51
Q

What happens if a SIPP operator fails?

A

SCS covers the claim up to £85,000 per person, per firm

52
Q

How can tax shelter benefits of UK investment bonds be maximised?

A

Arrange for investor to be a basic-rate taxpayer in the year of encashment

53
Q

Can you gift investment bonds?

A

Yes - no Tax to trustees or other individuals

54
Q

What is an advantage of offshore investment bonds?

A

They are not subject to UK tax so should grow faster

55
Q

What are some features of platforms

A

Reduced paperwork
Choice of funds
Tax wrappers
Allocation across wrappers
Consolidated statements
Portfolio reblanacing

56
Q

Q
Since 2014, why does the FCA require platform fees to be paid separately & directly?

A

To improve remuneration transparency and help consumers compare platforms

57
Q

What is the exception to the FCA’s platform fee rule?

A

The product provider can pay a rebate to the platform provider IF it is passed on to the consumer in the form of additional units

58
Q

What is one potential issue with third-party discretionary management services?

A

If the assets are held in the client’s name, the manager’s actions can trigger CGT liabilities

59
Q

Where is objectives and principal factors of how portfolio be managed set out

A

Investment policy statement

60
Q

If a trust deed has no specific investment powers, what governs the trustees?

A

Trustee Act 2000

61
Q

What is a churn?

A

A switch of investments where the primary aim is to generate income for the adviser

62
Q

What powers does Trustee Act 2000 give?

A

Invest as your own provided you have regard to standard suitability & diversification criteria

63
Q

What are the categories of overall investment objective?

A

Capital growth
Income
Balance

64
Q

What are some principles that affect investment strategies

A

Legal
Nature of liabilities
Cash flow
Taxation

65
Q

What does a strong positive cash flow into a portfolio mean for a manager?

A

They can take a long-term view & accept short-term uncertainty / losses

66
Q
A
67
Q

Where is means and frequrency of client reporting contained in

A

Terms of business letter given to clients
Otherwise agreed in writing

68
Q

Q
How can an advisor decide if complex new products & services are appropriate investments?

A

3rd-party advice or external services

69
Q

What is included in a contract note?

A

Bargain date & settlement date
Who purchase was made for
Number & price of shares
Full name of share
Charges including stamp duty/SDRT

70
Q

How often are summary portfolio evaluations usually issued?

A

Quarterly

71
Q

What does a summary portfolio evaluation include?

A

Value at date of last report
Addition of cash/stock
Reduction by each withdrawal
Appreciation or depreciation
New value & date

72
Q

What are some justifications for switching investments

A

Change in objectives
Client gives clear instructions
market conditions overweigh initial investment
Consistent underperformance of investment long term

73
Q

How to reduce CGT on property, collective investment or shares

A

Transfer to partner - gain CGT exempt ammount - or lower tax
Gain can be offset against other losses

R02 - 2023 (11 decks)

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