8 Flashcards
Theoretical approach
Based on the modern portfolio theory that aims to provide optimal portfolios i.e. maximum returns possible within given volatility
The 2 effects of correlation and diversification to a portfolio
Adding a higher risk investment to a portfolio can reduce risk if negatively correlated
Adding diversification can lower volatility
Pragmatic approach
Assumes history will repeat itself and selects the investments with the highest historical long term profit
Portfolio optimisation
Delivers highest rate of return for a given level of risk
Correlation matrix
Shows correlation investments have with each other so closer to 1 the higher the correlation
What assets should an advisor recommend when using a correlation matrix?
Lowest score as negatively correlated to diversify
Stochastic model
Gives range of what if questions on a investment to see possible returns
What is preferred an active fund management or passive fund management?
Passive
Top down portfolio instruction 4 steps in order
- Determine asset allocation
- Allocate geographical spread
- Choose sector weightings
- Choose sticks and consider any preferences
What has had a major impact on top down portfolio construction?
Globalisation
What is bottom up method of portfolio construction?
Top down method upside down
Growth at a reasonable price investing
Long term investment where advisor finds a firm with long term growth prospects
Contrarianism
Going against the trend and standard thinking. Usually used by hedge funds
What is the information ratio?
Comparing portfolios performance to the relative benchmark
ESG considerations
Environment
Social
Governance
Can an ISA be placed in trust?
No
Is a investment platform more or less expensive?
Less
Platform costs and fees must be what?
Transparent, agreed with the customer and not rebates payments from the fund providers
Platform for investments 3 benefits
- easy to monitor investments as all in one place
- some platforms auto ISA or auto rebalance
- clearly see charges
Discretionary management service
Give permission to trade on behalf of client whisker staying within risk profile
What is an independent asset custodian?
Thing that is protecting firm going bust and therefore also protecting the customer e.g. trustees and depository
On what document does a firm and client agree investment objectives?
In the investment policy statement
Example investments for each risk classification
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
What document should outline when reports will be provided?
Terms of business
When are valuations carried out?
At regular intervals but also available on demand
