Chapter 11 Flashcards
What is the difference between open-end and closed-end collective investment schemes
Open-end funds publicly offer their shares to investors.
Closed-end funds offer their shares to the public primarily through trading on security exchanged.
What is the efficiency frontier in portfolio theory?
A set of efficient portfolios that offer the highest return for a set amount of risk
What is systematic risk?
It is risk that affects all financial indexes/markets e.g. general economic conditions
What is unsystematic risk?
It is the variability not explained by general market movements and is peculiar to the security concerned.
How can you decrease unsystematic risk?
By diversifying the portfolio (Increase the number of securities)
What are the 2 ways of achieving superior portfolio performance?
1) Forecast the market accurately and adjust the beta of the portfolio accordingly
2) Achieve a positive alpha or excess return
What are the 2 categories of cash deposits in a bank?
Interest bearing or non-interest bearing
When choosing an interest-bearing account, what factors should an investor consider?
Interest rate
Term to maturity
Period of notice
Cost
Security
What are a few different deposit accounts?
Savings account
Notice deposit accounts
Money market accounts
NCDs
What is the lifetime contribution limit of a Tax Free Savings account?
R36 000 annual and R500 000 lifetime
What are the limits of retail savings bonds?
Min of R1 000 and max of R5 million
What is an annuity?
It is a contract to pay a set amount every year while the person on whose life the contract depends is alive.
Whats the difference between immediate and deferred annuity?
Immediate: in return for a single premium, an immediate annuity provides an annual payment starting immediately and continuing for the rest of the annuitant’s life
Deferred: a contract that provides annuity to be payable commencing at some future date. The period between the date of the contract and the date of commencement of payments is the deferred period. Regular premiums are payable throughout the deferred period.
What are the different types of annuities?
CPA (compulsory purchased annuity), VPA ( voluntary purchased annuity ), living annuity, composite annuity.
Whats the difference between CPA and VPA?
CPA - must by law be bought with a portion of the funds received from a matured retirement annuity. It is paid to the annuitant for life
VPA - can be purchased by anyone wanting guaranteed income. It can be taken for life or for a fixed term.
What is the biggest disadvantage of a CPA and VPA?
The income dies with the annuitant unless insurance cover is taken out for the capital or a guarantee is placed on the annuity.
What are retirement funds?
It is an independent non-profit legal entity that collects, invests and administers funds contributed to them by individuals and companies.
What are the 3 basic types of retirement funds?
Government pension schemes, personal retirement funds and occupational retirement funds.
What is a government pension scheme?
It is a scheme that pays a state pension to elderly citizens. It is funded out of taxes.
What is a personal retirement fund?
It is a funds that individuals enter to provide for their retirement. Such funds are funded by contributions from the individual
What is a occupational retirement fund?
It is a fund run by employers for the benefit of their employees
What are the 2 categories of retirement funds in South Africa?
1)
Provident funds - provides the full amount of the final retirement benefit to be taken in cash, subject to tax.
2)
Pension funds - at least 2/3 of the final retirement benefit to be paid as a life-long pension after retirement. 1/3 of the final benefit may be taken in cash, it is subject to tax.
What are the 2 broad fund structures?
Defined benefit funds - the retirement benefit is determined according to a formula linked to the beneficiary’s final salary. The employer is exposed to the investment risk of the fund.
Defined contribution funds - The retirement benefit is the sum of the total contributions made plus the net return on investment.
What is a collective investment scheme?
It is a term for any scheme where funds from various investors are pooled for investment purposes with each investor entitled to a proportional share of the net benefits of ownership of the underlying assets.
What does collective investment schemes consist of?
1) A pooling of resources to gain sufficient size for portfolio diversification and cost-efficient operation.
2) Professional portfolio management to execute an investment strategy.
What are the 2 categories of CISs?
Open-end funds - Public offering of shares to investors. Shares can be bought from or sold to the fund directly or via a broker acting for the fund
Closed-end funds - Offer share to public primarily through trading on a securities exchange
What are the 5 types of CIS?
Securities
Properties
Participation bonds
Foreign
Declared
What are real estate investment trusts (REIT)?
They are listed property investment securities that aim to provide investors with a rental income stream while also providing capital growth from sales of underlying properties
What are the 2 types of REITs?
Company REITs and trust REITS
What is private equity?
It is medium to long-term finance provided by investors in return for an equity stake in potentially high-growth companies
