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4. Fiduciary Relationships > 4. Investment Objectives & Strategy > Flashcards

4. Investment Objectives & Strategy Flashcards

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0
Q

When developing an investment strategy, what will the advisor need to determine?

A
  1. Risk tolerance
  2. Investment preferences
  3. Liquidity requirements
  4. Time horizons
  5. Tax status
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1
Q

What are the four main investment objectives

A
  1. Income
  2. Income & Growth
  3. Growth
  4. Outright Growth
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2
Q

What is the risk-return relationship?m

A

The rule for investment that states that the potential for spectacular return can only arise if the investor takes a large amount of risk

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3
Q

What is systematic risk?

A

Also know as Market risk, this is the risk that the whole market moves in a particular direction. It is typically applied to equities and is brought about by economic and political factors.

It cannot be diversified away

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4
Q

What us interest rate risk?

A

This is the risk that an interest rate movement may bring about an advert movement in the value of an investment. It is particularly acute when the investment is a fixed-interest bond and the interest rate rises. Because of the inverse relationship between bonds and interest rates, the value of the bond will fall.

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5
Q

What is unanticipated inflation risk?

A

When inflation is more substantial than the investor expected, the value if the investments held may fall. Generally, bonds will suffer because the fixed cash payments that they deliver are less valuable.

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6
Q

What is Exchange rate (or currency) risk?

A

For investments that are denominated in a currency other than the base currency of the investor, an adverse exchange rate movement will create an adverse movement in the value of an investment.

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7
Q

What is liquidity risk?

A

If an investor needs to realise cash from their investment quickly, they may suffer from liquidity risk. This is the risk that the value may suffer because the investment needs to be sold immediately.

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8
Q

What is credit risk?

A

Investors in bonds face credit risk. This is the probability of the issuer defaulting on their payment obligations. Credit risk can be assessed by reference to the independent credit rating agencies, mainly Standard & Poor’s, Moody’s and Fitch Ratings.

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9
Q

What are non investment grade bonds also know as?

A

Speculative or junk bonds

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10
Q

What is shortfall risk?

A

Shortfall risk relates to the inability of the investor to preach their financial goal. They may have been saving or investing in order to reach a target amount at some time in the future, such as to pay off a loan or mortgage, or to build up a particular level of retirement income.

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11
Q

Name 4 other risks faced by investors

A
  1. Equity capital risk
  2. Regulatory risk
  3. Income risk
  4. Reinvestment risk
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12
Q

Give some examples of possible investments for a no risk strategy

A

Cash deposits
Money market
Short-dated government bonds

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13
Q

Give some examples of possible investments for a low risk strategy

A

Fixed term deposits
Government bond funds
Guaranteed bonds

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14
Q

Give some examples of possible investments for a medium risk strategy

A

Bond funds
Equity funds
Global equity funds

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15
Q

Give some examples of possible investments for a high risk strategy

A

Global bond funds
Equity funds
Sector funds

16
Q

Name two examples of SRI

A

SRI = Socially Responsible Investing

Ethical investing
Sustainability investing

17
Q

What type of funds are know as dark green funds?

A

Ethical funds

18
Q

What type of funds are know as light green funds?

A

Sustainability funds

19
Q

What is triple bottom line?

A

When financial, environmental and social criteria are given equal prominence in company performance ratings by sustainability-investing research teams.

20
Q

Name an index that tracks performance of ethical and sustainability stocks

A

FTSE4Good

21
Q

What is meant by the liquidity requirements of a client?

A

Liquidity refers to the amount of funds a client might need both in the shirt and long term. When constructing an investment portfolio, it is essential that an emergency cash reserve input to one side that the client can access without having to disturb longer-term investments.

22
Q

Name a type of investment that a client would be able to readily realise in the event of an emergency

A

A bond ladder could be used, which involves buying securities with a range of different maturities. Building a laddered portfolio involves buying a range of bonds that mature in, say, three, five, seven and ten years’ time. As each matures, funds become available for the investor to withdraw or can be reinvested in later maturities.

23
Q

For a UK-based client with a moderate attitude to risk who is under 40, what would the largest proportion of asset allocation be invested in?

A 
Larger UK shares - 45%
Bonds - 25%
International Shares - 20%
Cash - 5%
Smaller UK shares - 5%
Property - 5%
24
Q

For a UK-based client with a moderate attitude to risk who is between 40-49 what would the largest proportion of asset allocation be invested in?

A 
Bonds - 35%
Larger UK shares - 30%
International shares - 15%
Cash - 10%
Smaller UK shares - 5%
Property - 5%
25
Q

For a UK-based client with a moderate attitude to risk who is 50-59, what would the largest proportion of asset allocation be invested in?

A 
Bonds - 50%
Larger UK shares - 25%
Cash - 10%
International shares - 5%
Smaller UK shares - 5%
Property - 5%
26
Q

For a UK-based client with a moderate attitude to risk who is 60-69, what would the largest proportion of asset allocation be invested in?

A 
Bonds - 45%
Cash - 35%
Larger UK shares - 15%
International shares - 5%
Smaller UK shares - 0%
Property - 0%
27
Q

For a UK-based client with a moderate attitude to risk who is over 70, what would the largest proportion of asset allocation be invested in?

A 
Cash - 50%
Bonds - 50%
Larger UK shares - 0%
International shares - 0%
Smaller UK shares - 0%
Property - 0%
28
Q

What information does the advisor need regarding the client’s tax status?

A
  1. The client’s residence and domicile position
  2. The client’s income tax position
  3. How tax will affect any investment income
  4. Any tax allowances which can be utilised
  5. How capital gains tax will affect any gains or losses made
  6. Any capital gains tax allowances which can be utilised
  7. Eligibility for any tax-free accounts
  8. Opportunities for and the desirability of deferring any tax due

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