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CISI - Portfolio Construction Theory in Wealth Management > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

What is the first step of meeting client goals?

A

Data gathering

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2
Q

What do you do in data gathering?

A

Understand client objectives

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3
Q

What is an IPS?

A

A mutual agreement between client and wealth manager to investment approach.

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4
Q

What is needed to determine client’s circumstances? (4)

A
  • Goals and objectives
  • Risk tolerance
  • Priorities
  • Constraints
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5
Q

Stability of principal

A

Preserving capital

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6
Q

Income objective

A

Gain income via bonds and preference shares

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7
Q

Growth of income

A

Bonds + High dividends

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8
Q

Capital appreciation

A

Equity and Equity-like instruments

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9
Q

Variable annuity

A

value depends on performance of investments

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10
Q

What are deferred annuities

A

delay the annuity income

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11
Q

conventional annuity

A

payment until death ☠️

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12
Q

guaranteed annuities

A

provide income up to a percentage of accumulated fund even after death ☠️

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13
Q

Additional features to annuities

A

Index linking 🔗

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14
Q

Annuity eligibility requirements

A

Age, minimum fund, uk + NI only

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15
Q

Who are eligible for enhanced annuities?

A

clients with low life expectancy

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16
Q

Benchmark characteristics

A
  • unambiguous 🤔
  • investable 🤑
  • measurable 📏
  • appropriate 👆
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17
Q

Types of benchmark

A

Peer 👯‍♀️
Broad market 🌎
Style indices 👜
Factor ✖️
Custom ✍️

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18
Q

What’s the aim of absolute return objective

A

Return in any market conditions

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19
Q

What is best efforts basis

A

Just focus on limiting risk

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20
Q

Why is best efforts basis good?

A

Hard not to meet return objective

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21
Q

Why is best efforts basis bad?

A

Might not meet return goals

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22
Q

Desired return

A

Return the client wants

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23
Q

Required return

A

Returned need to meet future goals and liabilities

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24
Q

Two ways to assess risk tolerance

A

Qualitatively and quantitatively

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25
Common risk questionnaire questions
- investment horizon 📅 - reaction to crash 📉 - confidence in finance 🙃
26
How to badly affect risk questionnaire questions?
Framing questions 🖼️
27
Advantages of using robo advisers
- easy account setup 😌 - automated process ⚙️ - low fees and charges 💸
28
Disadvantages of using robo advisers?
- not personalised 🥺 - not suitable for complex portfolios 🥴 - limitations in technology 🤖
29
What is the second term in the utility formula?
Penalty to expected return from investment
30
What does ESG stand for?
Ethical, social and governance
31
What does SRI stand for?
Socially responsible investing
32
What is impact investing?
Invest with positive environment or social impact along with financial return 💵 + 🌳
33
What is ethical investing?
Investing based on ethical or moral principles 🙏🏼
34
Socioeconomic characteristics that affect risk tolerance?
- gender 👨‍❤️‍👨 - marital status 💍 - age 1️⃣8️⃣
35
What impact does wealth have on risk tolerance
More wealth more tolerant
36
What impact does occupation have on risk tolerance?
Studies mixed.
37
Personal information included in IPS (3)
- name - residence - and tax status 🌎
38
Investment information included in IPS GIC
- goals and objectives 🥅 - income requirements 💸 - constraints 🌳
39
Further information needed in IPS (3)
Investment time horizon 📆 Benchmark 🪑 Performance monitoring 📄
40
What is tracking error?
How investment return differs from benchmark’s return
41
What is VaR (not what it stands for)
The likelihood of loss at a specific probability over a period of time
42
Drawdown
Loss of capital in monetary terms
43
What is systematic risk?
Risk of rise and fall in value as economic conditions change
44
What is the common proxy for market risk?
Beta
45
What is inflation risk?
The risk of inflation eroding purchasing power
46
What is interest rate risk?
Risk that changes in interest rates will affect prices
47
What kind of yield curve is expected in a recession?
Inverted yield curve
48
What is an inverted yield curve?
Long-dated yields less than short-dated bonds
49
How does higher interest rates affect consumers?
More expensive to service debt Less expendable income
50
Exchange rate risk
Risk that purchasing power decrease because of exchange rate
51
Default risk
Risk of company becoming insolvent
52
Another name for unsystematic risk
diversifiable risk
53
Examples of unsystematic risk
Management risk Business risk Industry risk
54
How does geometric mean compare to arithmetic mean?
arithmetic will always be the same or higher
55
What is a leptokurtic distribution?
When distribution is more pointed in the middle
56
What is a platykurtic distribution?
fatter tail and more flatter
57
What is a mesokurtic distribution?
a normal distribution
58
How does Cornish-Fisher VaR differ from VaR?
adjusts for skew and kurtosis
59
Different asset classes for diversification (6)
Cash FI Equities Collective investments SICAVS Unconventional investments
60
Diversification within FI (3)
Maturity Credit Rating Currency
61
Diversification in equities (4)
Number of companies Size Sector Geographical markets
62
Diversification in properties
Different properties Property based investments Types of property Location
63
How does diversification by manager help?
Reduces risk from a particular manager performing poorly
64
What is pound cost averaging (PCA)?
Investing fixed amount at fixed intervals of time
65
Benefits of PCA (3)
Avoids regret Seems more prudent Satisfies need to avoid loss
66
Two Disadvantages of PCA
Not logical Suboptimal strategy
67
Spot transaction
settles within 2 working days
68
Forward transactions
agreed for a future date at a rate of exchange fixed now
69
Use of Foreign Exchange (FX) market
International trade Speculation
70
What is risk premium?
expected return over no risk investment
71
Real Yield + Inflation Rate =
Nominal Yield
72
What is a common measure of liquidity
bid-offer spread
73
Two main risks in risk premium
Systematic and unsystematic
74
Is the risk premium in practice higher than the theoretical estimate?
Yes
75
How does risk premium differ for different countries?
Mainly the same around 4.5%
76
What is the Taylor Rule?
Recommendation on how short-term interest rates should be set

CISI - Portfolio Construction Theory in Wealth Management (15 decks)

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