15

Question 1

Rolls of equity in the overall portfolio

Answer 1

Capital appreciation
Dividend income
Diversification
Inflation, hedge potential

Question 2

Equity segmentation approaches

Answer 2

Size and style
Geography
Economic activity

Question 3

Advantages to segmenting by size and style

Answer 3

Better address, client investment considerations in terms of risk and return characteristics
Greater diversification benefits, by investing across different sectors and industries
Ability to construct a relevant benchmarks for funds that invest in a specific size and style
Ability to analyse how company characteristics change over time, for example, as a small Company matures

Question 4

Advantages and disadvantage of geographic segmentation

Answer 4

Advantages
Can understand how to diversify across international markets

Disadvantages
Currency risk
Overestimation of diversification benefit

Question 5

Production oriented approach

Answer 5

Segment companies buy products manufactured and input required during the production process

Question 6

How are equities an inflation hedge?

Answer 6

A company that can charge is customers more when input cost increase due to inflation can provide an inflation hedge by increasing cash flow and earnings as prices increase

Question 7

Market orientated approach

Answer 7

Companies by market served, how products are used by customers and how cash flows are generated

Question 8

Advantages and disadvantages to economic activity segmentation

Answer 8

Advantages
Allows portfolio manages to analyse , compare and contrast performance benchmarks based on specific sectors and industries
Diversification benefits enhanced

Disadvantages
Some companies may have operations, not easily assigned to one specific sector or industry

Question 9

Depository fees

Answer 9

Charge to assist custodians with segregating portfolio assets, and for verifying portfolio compliance with investment limits

Question 10

Types of income with equity portfolios

Answer 10

Dividend income
Securities lending, (short, sellers) fee
Selling options, for example covered calls
Dividend capture

Question 11

Dividend capture

Answer 11

When an investor by the stock right before, it’s ex dividend date, hold the stock through the ex dividend date and then sells the stock. This is profitable if stock price declined by less than the amount of the dividend

Question 12

Primary classification structures for segmenting companies by economic activity

Answer 12

Market oriented
Global industry classification standard

Production oriented
Industrial classification benchmark
Thomson Reuters business classification
Russel global sectors classification

Question 13

Investment strategy cost

Answer 13

Implicit costs related to the chosen investment strategy, for example, actively managed funds that require more investment analysis and transactions will have higher fees and costs then passively managed funds