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R02 - Investment Principals And Risk > Cards From Failed Questions > Flashcards

Cards From Failed Questions Flashcards

1
Q

Do NS&I bonds have a reinvestment limit

A

Yes- £500 minimum

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2
Q

The difference between strategic and tactical asset allocation

A

Strategic allocation is where a suitable asset allocation is decided by the clients risk portfolio

Tactical does the same however allows a variance of about 10% so if areas of the allocation are performing well or bad they can be altered within variance, it can also refer to the selection of specific funds where strategic would not

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3
Q

How is property income taxed

A

If property income is less than £1000 per annum before expenses then it’s exempt from income tax and doesn’t have to be declared. If it is over the threshold then it is taxed as normal income

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4
Q

What choices do holders of options have

A

To sell, let expire worthless or exercise the option on its website predetermined expirey date

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5
Q

What are the rates of income tax

A

8.75%, 33.75%, 39.35%

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6
Q

How are discretionary trusts taxed

A

Pay income tax on all income however £1000 is taxed at the rate of 8.75% (low tax band)

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7
Q

Can OEIC’s gear?

A

Yes they can gear to 10% without any time restrictions and commonly use single pricing

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8
Q

What are the levels of protection on a return

A

Hard - a definite return is guaranteed

Soft - a return is only guaranteed within a specific threshold

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9
Q

SDLT for BTL and second properties

A

They carry an additional 3% surcharge added on as a whole I.E.if it was a property worth £450,000 then) (£125,000 X 0 .02) + (£200,000 X0.05) + (£450,000 X 0 .03)

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10
Q

What is the typical annual management charge for tracker funds

A

0.5%

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11
Q

What are the investor return objectives

A

Capital preservation – risk adverse who minimise risk of loss, they want return equal to inflation.

Capital appreciation - long-term who want growth from capital gains.

Current income - investors focusing on income rather than capital gains

Total return – long-term who wants growth of value from capital gains and income

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12
Q

What is the time horizon

A

The time horizon is the importance of capital preservation in relation to the time until an event, the shorter the time makes the higher importance.

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13
Q

How much should a rainy day fund be worth

A

6 - 9 months of expenditure in liquid cash deposits

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14
Q

Benefit offshore bonds in relation to onshore

A

They are not subject to UK tax and so should grow more in theory, also due to them being held in another country you can chose when to be taxed on them by bringing them over. This is a trade off for usually a higher charge

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15
Q

What can MWR be used to measure

A

It can measure single funds however because it is effected by cash-flows it is not a good measure of portfolio as cash-flows are often of no influence from the fund manager only the client

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16
Q

When do you pay SD or SDRT

A

This type of tax is paid when you purchase shares, if done online you pay SDRT as it’s operated through CREST and SD is paid any other time.

SDRT Is sounded to nearest 0.01p where as SD is rounded to £5

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17
Q

Which is subjective and which is fact

  • risk tolerance
    -capacity for loss
A

Risk is subjective
Capacity for loss is fact

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18
Q

How do the interest rates move when more people decided I invest in short term securities

A

The more people invest, the lower the rate of short term interest becomes

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19
Q

What product can trade at a discount/premium and what would it be based off

A

Investment trusts can trade at premiums or discounts depending on the share price per share in relation to its NAV per share. If share price is lower than NAV then it’s trading at a discount

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20
Q

What is real asset protection

A

This is when an investments value moves in line with inflation, not necessarily beating it

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21
Q

What is an overlay strategy to asset allocation

A

Overlay strategy is to hold a core structure portfolio then use derivatives to alter the currency and market exposures

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22
Q

Which of the following use both nonsystematic and systematic risk

Modern portfolio theory, capital asset pricing model, arbitrage pricing theory

A

Arbitrage pricing theory

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23
Q

Explain deflation and it’s effects

A

Deflation occurs when the supply of goods rises faster than the supply of money, leading to increased purchasing power of money and a drop in price of goods. Because of this consumers buy less as they expect more purchase power in the future.

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24
Q

What is stochastic modelling

A

This is when maths is used to generate lots of outcomes, then combine the outcomes to create a range of portfolios and their probabilities

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25
Q

What is the price given for gilts in the Financial Times

A

Clean price

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26
Q

What is a structured product usually made out of

A

Zero-coupon bond and a call option

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27
Q

If someone’s portfolio is 40% less volatile than the market what would the portfolios beta be

A

0.6

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28
Q

According to the modern portfolio theory what should an investment portfolio be

A

Compromised of diverse and imperfectly correlated assets classes

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29
Q

What happens to the dividends of an offshore fund which invests in equities

A

The dividend it receives will have to pay a non-reclaimable withholding tax

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30
Q

Why invest in REIT’s?

A

They are a liquid way of investing in property

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31
Q

By stakeholder standards what Should the investment in an ISA be

A

The investment into an ISA cannot have a higher minimum deposit than £20

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32
Q

what is an efficient method to avoid capital gains

A

You can transfer shares to a partner who can then in cash using the CGT allowance

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33
Q

 What methods does modern portfolio theory use to form it’s portfolios

A

Optimisation, using the efficient frontier

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34
Q

What does standard deviation denote

A

Star deviation is the measure of volatility

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35
Q

How Can index linked government securities guarantee inflation proofing

A

Holding them to redemption

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36
Q

What are the taxation properties of an enterprise investment scheme

A

EIS Allow for a 30% income tax relief up to £2 million investment, this can also be carried back for a previous tax year. CGT can also be deferred if the gains reinvested

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37
Q

What is absolute return on a fund

A

When a fund achieves a positive return in all market conditions

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38
Q

If a product has 101% of the value of its investment life cover what type of policy is it likely to be

A

Investment bond

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39
Q

Does the holding period return equation take income into account

A

Yes

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40
Q

When doing interest/redemption yield should have the rates be fractional decimalised or standardised

A

Decimalised

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41
Q

What would a negative information ratio suggest

A

A better return would have been achieved bye matching the index using a tracker

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42
Q

If a guilt is bought within a specific amount of days until the interest payment date then what happens and what is the amount of days that it would have to be bought within

A

7 days

The purchaser pays the dirty price which is the claim price minus the effects of interest which would’ve been paid and for this they do not receive the interest as the seller still gets all the interest

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43
Q

Causes of interest rate movements

A

Economic cycle: strong demand and economic activity increase interest rates

Government fiscal policy: government issue gilts to fund deficit, tends to push medium to long gilts yields up

Government monetary policy: quantitive easing reduces short-term rates and government purchase of long dated bonds impacts long-term rates

Inflation expectation: long-term expected to increase if inflation is expected to increase as well

Uncertainty: times of insurgency investors prefer short securities decreasing short-term interest rates


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44
Q

What protection do unit trusts have

A

Give me trust for three layers of protection; the trustees of the unit trust, the financial services compensation scheme and the complaints and arbitration procedures

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45
Q

Name the low risk fixed interest securities and the low risk equities

A

Low risk fixed interest securities; guilt, global gov bond, investment grade corporation bonds

Low risk equities; equity income funds, income and growth funds

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46
Q

Name the high risk fixed interest securities and equities

A

High-risk fixed interest securities; emerging market bond, ideal bond, tactical bond

High risk equities; alpha funds, smaller company funds, specialist funds

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47
Q

According to behavioural finance ferry how much more grief does a lost cause than the joy of again

A

Double

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48
Q

Using standard deviation as an indicator of volatility what should be the distribution level for an acceptable probability of return

A

Normally distributed

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49
Q

Is the taxation on the underlying funds of an investment bond more or less than a trust would normally be subject to

A

More

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50
Q

What is Sharpe ratio used to measure

A

The risk of an investment

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51
Q

How often is the interest on a bond typically paid

A

Half yearly

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52
Q

In what order is preference shares ordinary shares and existing credit paid in the event of liquidation

A

Credit then preference shares then ordinary

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53
Q

What is government spending

A

Government spending is a method of monetary policy, higher net government spend stimulates the economy

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54
Q

What happens to the price of fixed interest securities in a booming economy

A

In a booming economy the price of fixed interest securities will fall as they appear less profitable due to a positive economy

55
Q

What are the current in the capital accounts

A

The current account consists of transactions, while the capital account records investments movements

56
Q

Name the limitations of the efficient frontier model

A

-It assumes standard deviation is the correct measure of risk
-It’s assumes the underlying portfolio in each assets class index funds
-It doesn’t include transactional cost

57
Q

Name the assumptions of the capital asset pricing model

A

All info is free and available to all, every investor has the same holding period and that investors are rational and risk adverse

58
Q

How do you obtain NNS and I certificate

A

NS and I are not currently available except for existing customers who can renew their investment

59
Q

What would cause a flat yield curve

A

Investors demand higher returns for longer redemption periods which creates a normal yield curve, a flat curve would indicate that there are no expected radical changes to inflation and interest rates

60
Q

What Investment curve would there be if investors believed that long-term interest rates would fall due to the belief that short-term interest rates were going to fall

A

An inverse curve because the long-term interest rates will fall whereas the short-term may not

61
Q

What is the name of the lease agreement was landlords use commonly

A

Landlords properties for a fixed period of around 6 to 12 months, these are called assured short hold tenancy agreement

62
Q

What is the formula for rental yield

A

Rental yield equals gross rent minus expenses divided by market cost plus purchase cost times by 100

63
Q

Does net asset value Include long-term debt

A

Yes

64
Q

How does monetary policies use of interest rates stimulate the economy

A

Monetary policy uses interest rates to influence money supply, if low inflation rates then they will lower the interest rates so that the borrowing costs are cheaper, this leads to more money for the public which then creates more consumer spending and thus stimulating the economy increasing inflation

65
Q

Is capital asset pricing model a multi factor model

A

No it’s single factor

66
Q

What type of bond fund pays interest without a taxdeduction

A

Corporate bond fund

67
Q

How are onshore investment bonds taxed

A

Onshore investment bonds are deemed to have paid basic rate tax so additional 20% for higher rate and 25% for additional rate tax is due on capital gains

68
Q

How are offshore investment bonds taxed

A

Offshore investment bonds have capital gains taxed as income at investors highest rate

69
Q

What are the tax positions of venture capital trust, seed enterprise investment schemes, enterprise investment schemes

A

VCT have tax relief at 30% up to £200,000

SEIS half tax relief at 50% up to £100,000

EIS have tax relief of 30% up to £2 million

70
Q

How long after the acquisition of SAYEO share incentive plan shares will they be eligible for investment into an ISA

A

90 days

71
Q

What is the difference between a pension annuity and a purchase life annuity

A

Pension duties are taxed in full as income whereas purchase light annuities have a capital and income element the capital is tax-free

72
Q

What is arbitrage

A

Arbitrage is the practice of selling and buying securities across different markets to take advantage of differing prices of the same security

73
Q

What strategy does someone who uses arbitrate use

A

Relative value

74
Q

What are the characteristics of securities

A

Fixed interest securities are characterised as security of income, with varying degree of exposure to capital gains and losses. Securities include bonds, gilts, loan stock.

75
Q

What is the most important part of the clients fact find process

A

To understand the clients goals and expectations

76
Q

What is the limitations of risk in any finance theory framework

A

The discussion of risk in any finance framework is tricky as it is a psychological factor that isn’t easily quantifiable, hence is not very helpful when helping clients to come to terms with the actuality of risk-return trade-off

77
Q

What is a multi-manager fund

A

Multi managed fund has the manager of the fund research and select the funds, so advisors who don’t want to do the research can use these

78
Q

How are fixed interest investments taxed within pension schemes

A

Pension schemes of the tax relief on contributions, fixed interest investments held in pensions are not taxed

79
Q

What are investments designed to much future liabilities

A

Defined benefit pension is (final salary scheme), life assurance, general insurance

80
Q

What is the most important aim for short-term time horizons

A

Capital preservation

81
Q

How do withdrawals work on a junior cash ISA

A

They can be made at any time without the loss of tax relief

82
Q

What is the FTSE fledgling

A

These are companies that are too small to be in the FTSE all share

83
Q

What are the two types of value index related to FTSE

A

Valuated and price weighted

84
Q

What is the Dow Jones made up of

A

30 blue-chip companies

85
Q

How do people usually invest into commodities

A

Usually done through commodity funds or in companies to produce commodities or exchange traded commodities

86
Q

What are exchange traded notes

A

ETNs Debt instruments issued by large financial institutions (similar to bond but without the interest payments)

87
Q

What do investment trusts need in order to be approved by the HMRC

A

Retain less than 15% gross income

88
Q

What are warrants

A

Warrants are not a method of gearing, they are the right to buy shares at a fixed price at a predetermined date, they can be bought or sold and are high risk

89
Q

What are the benefits of with profits funds

A

With profits funds of exposure to equity markets for those risk adverse as well as ownership rights in the life office

90
Q

What are the benefits of offshore investment bonds as opposed to offshore funds

A

It is easier to place an offshore investment bond into trust instead of an offshore fund. Offshore bonds have a 5% tax deferral withdraw facility

91
Q

What tools can portfolio managers use to achieve better results

A

They can exercise asset allocation, stock selection, risk and market timing

92
Q

What are the principal factors affecting investment strategy found in the investment policy statement

A

Cash flow requirements, legal constraints, nature of liability, investment objectives, attitude to risk, taxation.

93
Q

What are synthetic and physical passive funds

A

A synthetic passive fund is the exchange traded fund that uses derivatives to match the index. A physical passive fund is an exchange traded fund that holds stocks to replicate the index

94
Q

What is a key issue for a discretionary managed service

A

Tax management is a key issue for discretionary manage service, if they are held in different investment vehicles the assets that are held directly rather than in a tax wrapper could trigger CGT

95
Q

What are the main UK FTSE index is and FTSE AIM indexes

A

Allshare, 100, 250, 350. All FTSE are arithmetically waited and the 100 is updated consistently throughout the day

50, 100, I’ll share, all share super sector

96
Q

What is a drawback of an index being capitalisation weighted

A

The few large companies can have a substantial effect across the index

97
Q

Alpha as part of the return that cannot be explained by overall market movements

A

Just learn this

98
Q

What is the performance evaluation And performance measurement

A

Performance evaluation measures whether an investment has added value to the portfolio and how it is added the value. Before Woods valuation is concerned with the performance of the manager and and how they have added value, not if it has met the expectations of a client.

Performance measure is the measure of the return of the portfolio

99
Q

Which is cheaper to invest in investment trusts or unit trusts

A

It is cheaper to invest in investment trust because they can be discounted, they can also provide higher returns because of this

100
Q

Is the game on encashment of a guaranteed growth bond grossed up

A

No

101
Q

What are the conditions for an endowment to be a qualifying policy

A

Premiums paid in any year may not be double paid in any other year, premiums must be paid at least annually, the policy term must be at least 10 years and the minimum life cover is 75% of the total premiums paid, no one premium can be more than 1/8 of the total premiums payable over the term of the policy, upon selling the policy if the client is the original owner then there is no CGT

102
Q

How are the dividends from the non-ring fenced proportion of a REIT paid

A

The dividends are paid gross

103
Q

What is the use of information ratio

A

The information ratio is used to assess risk adjusted performance

104
Q

Why is past performance essential to a managers fund measurements

A

Past performance essential to measuring a fund managers performance and then rewarding where appropriate

105
Q

What are the characteristics of treasury bills

A

Treasury bills are managed by the debt management office which is an agency of HM Treasury, minimum purchase of £500,000, no interest, acts a bit like a bond

106
Q

What are the characteristics of a certificate of deposit

A

Fixed rate of interest and fixed term majority so you cannot withdraw it any sooner, can be traded but due to the ability to trade the rates are slightly lower than the ordinary deposits

107
Q

Characteristics of commercial bills

A

Commercial bills or death instruments issued by companies with high credit ratings to fund the daily cash flows. They operate like a Treasury bill but less liquid, because of this they are typically higher yield then Treasury bills

108
Q

Is the interest on an NS and I taxable

A

Yes even though the interest on an NS and I is paid gross it is still taxable

109
Q

What is the downfall of investment ratios

A

Accounting policies often change over time making any investment ratio comparison between companies misleading, however, they are useful for tracking some trends. Net asset value is quite useful

110
Q

Stamp duty land tax funds

A

Commercial property: Has Studley land tax of 0% up to £150,000 then 150,000 to 250,000 has 2% anything 250,000 higher is 5%

Residential stamp duty land tax: 0 to 125 = 0%, 125 to 250 = 2%, 250 to 925 = 5%, 925 to 1,500,000 equals 10% anything over 1,500,000 equals 12%

First time buyers: 0 to 300,000 equals 0%, 300,000 to 500,000 = 5%, However no relief is offered on first time purchases over 500,000

BTL is normal plus 3% surge charge

111
Q

What is fiscal policy

A

Fiscal policy is using taxation to adjust levels of spending, higher tax equals less spend to be done in a booming economy or opposite in a recession

112
Q

What is quantitive easing

A

Wants to be using is the injection of money into the market, the more liquidity is good, so they buy government bonds and corporation bonds

113
Q

What resultant effect will the drop in the value of the pound have on a companies share price which is an exporter from the UK

A

If the value of the pound falls the cost of UK export goods is less, which results in high demand for the product, hence share prices may rise

114
Q

What Does the efficient market hypothesis recommend

A

Tracker funds as everything is reacted to everything so there’s no way to beat the index

115
Q

What is optimisation

A

Optimisation is where a computerised model tracks the index it is following

116
Q

When do the shares of an enterprise investment scheme become free of inheritance tax

A

If held for two years then they qualify for hundred percent business relief

117
Q

What is the loophole associated with a JISA

A

A junior ISA is open for anyone under age 18, they can have £9000 per annum tax relief in this allowance, This doesn’t affect the £20,000 allowance which is allowed on any adult cash ISA, I can have a cash ISA from 816 onwards. So from ages 16 to 17 The child can have a allowance of £29,000 and hold both the junior ISA and the adult cash ISA

118
Q

At what age is a junior ISA taken over from the parents by the child

A

Age 16

119
Q

What is being in an open position and what is marking the market

A

When making an initial financial futures trade, a client opens deposition on the derivative market, so they are then referred to as being in an open position. During this open position the financial factors are valued daily, this is known as marking the market

120
Q

What Frequency showed the ongoing client reviews occur

A

This will be stated in the clients agreement this has been agreed on by the client advisor however is typically six months after the investment and then yearly onwards

121
Q

How many risk profiles and how do I determine which is the appropriate one

A

There are seven profiles and you can determine which is which through the amount of percent held in equity this ranges from 30% to 75% to be with a five or 10% increase between each just kind of guess

122
Q

What is the average weight is majority of the short-term money market instrument

A

60 days

123
Q

What does a higher price earnings ratio represent

A

Generally means of the company is expected to do well and grill

124
Q

What is disinflation

A

This inflation is the decrease in the rate of inflation, however, is it still increasing and so the cost of goods and services are still increasing

125
Q

 What is the duration of a bond

A

A bond duration is the sensitivity to the interest rate changes.

I.E.a bond with duration for will have a gain of 4% for everyone percent fall in interest rates as they are adversely correlated

126
Q

Who holds the registry of the unit trust holders

A

This is held by the trustees and can be closed for up to 30 days a year

127
Q

What is the hurdle rate

A

Hurdle rate is specific to split capital investment trusts, it is the annual growth rate the investment must achieve to pay the current purchase price, the predetermined redemption value or the value that wind up

128
Q

What are the main US stock indexes

A

The Dow Jones the standard and poor and the NASDAQ

129
Q

What features should be locked out for when buying a buy to let property

A

Availability of tenants, location and age.

Void periods are not a thing to look out for they are just a drawback

130
Q

What is a bit of a spread

A

Bit of the spread is the difference between the buying and selling price. This is a combination of the dealing costs, underline market and the initial charges

131
Q

When do managers have to give warning to investors are using an investment trust

A

When investing in an iced tea which uses gearing as a strategy of investment directly or indirectly

132
Q

Which policy generates no taxable income

A

Investment bond

133
Q

The writer of an option received a premium from a buyer but what does the writer have to pay

A

The right of Pisa commission And a margin payment fee

134
Q

What is being overweight or underweight in asset allocation

A

This is when you do not match the benchmark exactly and I either overweight by picking higher or underweight by picking lower this is not necessarily a bad thing it’s just a perspective

R02 - Investment Principals And Risk (13 decks)

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