Areas for improvement - 01/04/2025 Flashcards
What is Smart Beta
The key difference between a smart beta fund and a traditional index fund is that a smart beta fund does not track a market capitalisation-weighted index but, instead, tracks an index based on fundamental characteristics; these can range from macroeconomic factors, such as economic growth, to investment style factors.
What are the assumptions of APT
The underlying assumptions of APT include the following:
Securities markets are price efficient.
Investors seek to maximise their wealth, though they do not necessarily select portfolios on the basis of mean variance analysis.
Investors can sell securities short.
Identified factors are uncorrelated with each other.
What is a leading indicator
A leading indicator can point to where the price might move to next. If a share price is falling and the indicator rises before the price actually does, it is considered a leading indicator (ie, the indicator predicts the rise). Of course, leading indicators are not always correct so they should be viewed as guidance.
What is a lagging indicator
All technical indicators are considered to be lagging indicators. They are based on historical data and do not predict a price direction. A lagging indicator is generally triggered by an event that has happened and are relatively self-explanatory. To put it simply, lagging indicators measure something that has already occurred to help predict future success.
What is a MTF
An MTF is a system that brings together multiple parties (eg, retail investors or other investment firms) that are interested in buying and selling financial instruments and enables them to do so
What is a OTF
An OTF is a multilateral system that is not a regulated market or an MTF. Within an OTF, multiple third-party buying and selling interests in bonds, structured finance products, emission allowances, or derivatives can interact in a way that results in a contract.
What is a System Internaliser (SI)
An SI is, in broad terms, a qualifying investment firm that (on an organised, frequent, systematic and substantial basis) deals on its own account by executing client orders outside a regulated market, MTF or an OTF. The firm executes orders from its clients against its own book or against orders from other clients.
What are the 3 liabilities in accounting known as?
There are three broad categories of liabilities:
Creditors or payables – these are known amounts the company owes, eg, invoices received, bank overdrafts, and so on.
Accruals – these are liabilities for which the timing of payment is generally known, but the amount to be paid is uncertain. Accruals normally arise from routine transactions of the business, either of an operating or financing nature.
Provisions – a provision represents either an amount to account for the reduction in the value of an asset (eg, depreciation) or an estimate of a known but not exactly quantified liability arising from something outside of the normal trading activities of a company.
IAS 2 does not permit the use of which way companies can account for their stock?
Last in first out (LIFO) – LIFO assumes that the most recent stock purchased by the company is the first to be sold. IAS 2 does not permit the use of LIFO since, in times of rising prices, the value of closing stock on the balance sheet will be that of the stock first purchased, so it will not resemble current prices. It also produces the lowest reported profit figure of the three bases.
What does the ‘income statement’ do
The income statement (also called the statement of comprehensive income) summarises the company’s revenue transactions over the accounting period to produce a profit or a loss.
What are the two specific functions of the income statement?
The two specific functions of this financial statement are to:
detail how the company’s reported profit was arrived at, and state how much profit has been earned and how it has been distributed. The amount of profit earned over the accounting period will impact the company’s ability to pay dividends and finance the business’s growth from internal resources.
What is a cash flow statement
Cash flow statements (also called statement of cash flows) seek to identify how a company’s cash has been generated over the accounting period and how it has been expended.
The equity method of accounting requires that if A has a 30% shareholding in B, for instance, then:
30% of company B’s post-acquisition operating profit, interest payable, interest receivable and tax are added to company A’s respective income statement items in the consolidated income statement.
Any dividends received by A from B do not, however, enter the consolidated income statement.
Company B’s post-acquisition profits are those that arise after A has taken a stake in B as an associated company.
30% of the value of company B’s net assets and the value of any purchased goodwill that arose on making this investment in company B will appear in the consolidated balance sheet.
What is he formula for P/E ratio?
“The PER ratio is calculated by dividing the market price by the EPS as follows:
PER = Share price / EPS
What does DuPont Analysis use to work out ROE?
In brief, DuPont analysis breaks down ROE into three different components:
Operating efficiency – which is measured by net profit margin. A company’s primary factor is to maintain healthy profit margins and derive ways to keep growing its net profit margins (eg, by reducing costs, or increasing prices). As net profits increase, so too will ROE.
Asset use efficiency – which is measured by total asset turnover; in other words, the efficiency of a company using its assets. Note that the ratio differs across different industries, although comparing firms in the same industry is useful. As asset turnover increases, this will positively impact ROE.
Financial leverage – which is measured by the equity multiplier (ie, financial leverage). Debt should be used to finance the company’s operations andgrowth; however, the use of excess debt to increase ROE can be detrimental to the company’s financial health
What can be said is a company has a interest cover of less than 1.5?
An interest cover of 1.5 or less indicates that its ability to meet interest expenses may be questionable. This ratio, however, requires careful interpretation, as it is susceptible to changes in the company’s capital structure and general interest rate movements, unless fixed-rate finance or interest rate hedging is employed
How are pre-payments classified and valued in the balance sheet?
Current asset that is valued at the lower of cost or net realisable value
What is the difference between immobilised and dematerialised share certificates?
Immobilised – refers to where share certificates are still issued but they are held in a central vault and not issued to shareholders, hence the term immobilised.
Dematerialised – was a process that was developed later and involves dispensing with the certificate altogether.
What happens to the shares on ex-dividend date?
On the ex-dividend day, the share trades without the right to the next dividend payment; they are said to be ex-dividend.
What are th choices available to shareholders when a companies issues a rights issue?
The choices open to shareholders under a rights issue are:
Take up the rights in full by purchasing all of the shares offered.
Sell the rights.
Sell sufficient of the rights to take up the balance (an approach sometimes known as tail-swallowing).
Take no action and allow the rights to lapse, which means that the company will sell the rights for the investor and distribute any proceeds to the investor. This is often the most economical way to proceed for the smaller shareholder not wishing to increase their shareholding in the company.
What is the Delta score for long futures and short futures?
the underlying physical asset and long futures will always have a delta of +1 and short futures will have a delta of –1.
What is Vega
Vega is a measure of how a 1% change in implied volatility affects an option’s price. Vega is always positive for long options positions (both calls and puts). It is greatest for ATM options. The further that an option goes to ITM or OTM, the smaller the vega will become.
