8

Question 1

Theoretical approach

Answer 1

Based on the modern portfolio theory that aims to provide optimal portfolios i.e. maximum returns possible within given volatility

Question 2

The 2 effects of correlation and diversification to a portfolio

Answer 2

Adding a higher risk investment to a portfolio can reduce risk if negatively correlated

Adding diversification can lower volatility

Question 3

Pragmatic approach

Answer 3

Assumes history will repeat itself and selects the investments with the highest historical long term profit

Question 4

Portfolio optimisation

Answer 4

Delivers highest rate of return for a given level of risk

Question 5

Correlation matrix

Answer 5

Shows correlation investments have with each other so closer to 1 the higher the correlation

Question 6

What assets should an advisor recommend when using a correlation matrix?

Answer 6

Lowest score as negatively correlated to diversify

Question 7

Stochastic model

Answer 7

Gives range of what if questions on a investment to see possible returns

Question 8

What is preferred an active fund management or passive fund management?

Answer 8

Passive

Question 9

Top down portfolio instruction 4 steps in order

Answer 9

1. Determine asset allocation
2. Allocate geographical spread
3. Choose sector weightings
4. Choose sticks and consider any preferences

Question 10

What has had a major impact on top down portfolio construction?

Answer 10

Globalisation

Question 11

What is bottom up method of portfolio construction?

Answer 11

Top down method upside down

Question 12

Growth at a reasonable price investing

Answer 12

Long term investment where advisor finds a firm with long term growth prospects

Question 13

Contrarianism

Answer 13

Going against the trend and standard thinking. Usually used by hedge funds

Question 14

What is the information ratio?

Answer 14

Comparing portfolios performance to the relative benchmark

Question 15

ESG considerations

Answer 15

Environment
Social
Governance

Question 16

Can an ISA be placed in trust?

Answer 16

No

Question 17

Is a investment platform more or less expensive?

Answer 17

Less

Question 18

Platform costs and fees must be what?

Answer 18

Transparent, agreed with the customer and not rebates payments from the fund providers

Question 19

Platform for investments 3 benefits

Answer 19

• easy to monitor investments as all in one place
• some platforms auto ISA or auto rebalance
• clearly see charges

Question 20

Discretionary management service

Answer 20

Give permission to trade on behalf of client whisker staying within risk profile

Question 21

What is an independent asset custodian?

Answer 21

Thing that is protecting firm going bust and therefore also protecting the customer e.g. trustees and depository

Question 22

On what document does a firm and client agree investment objectives?

Answer 22

In the investment policy statement

Question 23

Example investments for each risk classification

Answer 23

Low - cash, fixed interest securities and gilts

Medium - large UK companies, collective investment schemes, some small to medium companies

High - more volatile and unlisted shares, commodities

Question 24

What document should outline when reports will be provided?

Answer 24

Terms of business

Question 25

When are valuations carried out?

Answer 25

At regular intervals but also available on demand