5 - Nature and impact of the main types of risk on investment performance Flashcards
What are the three main inflationary measures?
CPI
CPIH
RPI
What is the CPI primarily and secondarily used for by the Governmen?
Measure of inflation by the government
Increasing state benefits and the state pension
What are some of the coseqeunces to rising inflation?
bottlenecks in production causing price rises and imports flood into the country
Government responds by rising interest rates
Cuts in public expenditure and tax increases dampen demand
The ecomony enters recession and prices steady or fall as supply exceeds demand
What in the definition of stagflation?
Combination of stagnant growth and inflation
What investments might an investor consider including in their portfolio to give some protection against inflation?
Index linked guilts
assets that can provide long term growth such as equities, property, infrastructure or commodities which have generated positive real returns in the long term
What are the main causes of interest rate moves?
The economic cycle Government fiscal policy Government monetary policy Inflation expectations Preference for liquid securities
What are the different types of credit risk for investors?
Default risk
Downgrade risk
Credit spread risk
Counterparty risk
What is ‘bail in’ risk?
Financial assistance for a financial instuitution comes from the existing capital base, such as shareholders, bond holders an depositors
Holders might see their holdings reduced by the bank
What are the key elements of operational risk?
Settlement or counterparty risk fraud misrepresentation systems failure trading errors or unauthorised trading Staff errors Regulatory risk
List six major risks that affect investments, other than inflation risk?
Interest rate credit currency liquidity event political
What is the definition of Gearing?
Borrowing money in a clients portfolio with the objective if increasing exposure to other assets, often equities.
What is the impact of gearing?
It will magnify positive and negative portfolio returns
