9. Investment Planning

Question 1

What is stochastic modelling and what are the 3 variables?

Answer 1

Statistical sampling - produces a range of possible returns and their probability

Trend variable; describe & predict expected returns
Range variable; how volatile the return could be
Relationship variable; connection between events

Question 2

In what 2 ways can an investment manager act?

Answer 2

Advisory; recommend action which client can reject/accept. KYC required. Each transactions is authorised by client

Discretionary; manager makes decisions in line with agreement

Question 3

What 4 ways can asset allocation be determined by a fund manager?

Answer 3

Optimisation:
- use efficient frontier to allocate on risk & reward basis
- optimal portfolio is one giving highest return for acceptable risk or lowest risk for desired return
- backtesting - applying rules to historic data to compare performance to actuals

Benchmarks: copy model portfolios

Question 4

Difference between strategic and tactical asset allocation for fund manager?

Answer 4

Strategic; established as start and stuck to

Tactical; opportunistic and evolving to maximise returns

Question 5

What is passive investment management and the 4 types?

Answer 5

Tracking the market or index.

Full replication; copying index exactly (impractical and expensive)

Stratified sampling; representative sample (won’t perform exactly same as index)

Optimisation; use of analytical model

Synthetic; buys index futures/forwards/swaps to replicate performance

Question 6

What are the 2 types of active investment management?

Answer 6

Bottom-up; stock picking based on each co’s value/potential

Top-down; portfolio based on macro factors
- establish asset allocation
- decide sectors & weightings
- individual stock picking

Question 7

What are the 2 types of analysis of companies?

Answer 7

Fundamental; performance of company

Technical; patterns of price & trading volumes on market

Question 8

What is core and satellite management?

Answer 8

Combining passive and active fund management

Question 9

Describe the following:

Wrap accounts
Fund supermarkets
Wrap platforms

Answer 9

Wrap accounts; platforms to see all investments in one place

Fund supermarket; fund managers rebate part of AMC to platform for inclusion. Not whole of market. Free for investors

Wrap platforms; investors pay for access - whole of market. Some funds rebate up to 50% back to platform