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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
Q

Common risk questionnaire questions

A
  • investment horizon 📅
  • reaction to crash 📉
  • confidence in finance 🙃
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26
Q

How to badly affect risk questionnaire questions?

A

Framing questions 🖼️

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27
Q

Advantages of using robo advisers

A
  • easy account setup 😌
  • automated process ⚙️
  • low fees and charges 💸
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28
Q

Disadvantages of using robo advisers?

A
  • not personalised 🥺
  • not suitable for complex portfolios 🥴
  • limitations in technology 🤖
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29
Q

What is the second term in the utility formula?

A

Penalty to expected return from investment

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30
Q

What does ESG stand for?

A

Ethical, social and governance

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31
Q

What does SRI stand for?

A

Socially responsible investing

32
Q

What is impact investing?

A

Invest with positive environment or social impact along with financial return 💵 + 🌳

33
Q

What is ethical investing?

A

Investing based on ethical or moral principles 🙏🏼

34
Q

Socioeconomic characteristics that affect risk tolerance?

A
  • gender 👨‍❤️‍👨
  • marital status 💍
  • age 1️⃣8️⃣
35
Q

What impact does wealth have on risk tolerance

A

More wealth more tolerant

36
Q

What impact does occupation have on risk tolerance?

A

Studies mixed.

37
Q

Personal information included in IPS (3)

A
  • name
  • residence
  • and tax status 🌎
38
Q

Investment information included in IPS

GIC

A
  • goals and objectives 🥅
  • income requirements 💸
  • constraints 🌳
39
Q

Further information needed in IPS (3)

A

Investment time horizon 📆
Benchmark 🪑
Performance monitoring 📄

40
Q

What is tracking error?

A

How investment return differs from benchmark’s return

41
Q

What is VaR (not what it stands for)

A

The likelihood of loss at a specific probability over a period of time

42
Q

Drawdown

A

Loss of capital in monetary terms

43
Q

What is systematic risk?

A

Risk of rise and fall in value as economic conditions change

44
Q

What is the common proxy for market risk?

A

Beta

45
Q

What is inflation risk?

A

The risk of inflation eroding purchasing power

46
Q

What is interest rate risk?

A

Risk that changes in interest rates will affect prices

47
Q

What kind of yield curve is expected in a recession?

A

Inverted yield curve

48
Q

What is an inverted yield curve?

A

Long-dated yields less than short-dated bonds

49
Q

How does higher interest rates affect consumers?

A

More expensive to service debt
Less expendable income

50
Q

Exchange rate risk

A

Risk that purchasing power decrease because of exchange rate

51
Q

Default risk

A

Risk of company becoming insolvent

52
Q

Another name for unsystematic risk

A

diversifiable risk

53
Q

Examples of unsystematic risk

A

Management risk
Business risk
Industry risk

54
Q

How does geometric mean compare to arithmetic mean?

A

arithmetic will always be the same or higher

55
Q

What is a leptokurtic distribution?

A

When distribution is more pointed in the middle

56
Q

What is a platykurtic distribution?

A

fatter tail and more flatter

57
Q

What is a mesokurtic distribution?

A

a normal distribution

58
Q

How does Cornish-Fisher VaR differ from VaR?

A

adjusts for skew and kurtosis

59
Q

Different asset classes for diversification (6)

A

Cash
FI
Equities
Collective investments
SICAVS
Unconventional investments

60
Q

Diversification within FI (3)

A

Maturity
Credit Rating
Currency

61
Q

Diversification in equities (4)

A

Number of companies
Size
Sector
Geographical markets

62
Q

Diversification in properties

A

Different properties
Property based investments
Types of property
Location

63
Q

How does diversification by manager help?

A

Reduces risk from a particular manager performing poorly

64
Q

What is pound cost averaging (PCA)?

A

Investing fixed amount at fixed intervals of time

65
Q

Benefits of PCA (3)

A

Avoids regret
Seems more prudent
Satisfies need to avoid loss

66
Q

Two Disadvantages of PCA

A

Not logical
Suboptimal strategy

67
Q

Spot transaction

A

settles within 2 working days

68
Q

Forward transactions

A

agreed for a future date at a rate of exchange fixed now

69
Q

Use of Foreign Exchange (FX) market

A

International trade
Speculation

70
Q

What is risk premium?

A

expected return over no risk investment

71
Q

Real Yield + Inflation Rate =

A

Nominal Yield

72
Q

What is a common measure of liquidity

A

bid-offer spread

73
Q

Two main risks in risk premium

A

Systematic and unsystematic

74
Q

Is the risk premium in practice higher than the theoretical estimate?

A

Yes

75
Q

How does risk premium differ for different countries?

A

Mainly the same around 4.5%

76
Q

What is the Taylor Rule?

A

Recommendation on how short-term interest rates should be set

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

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