Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

A311 > Chapter 11: Other investment classes > Flashcards

Chapter 11: Other investment classes Flashcards

1
Q

Collective investment schemes (CIS)

A

Provide structures for the management of investments on a grouped basis. Provide an opportunity for investors to achieve a wide spread of investments and therefore to lower portfolio risk.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

2 types of CIS

A

Close-ended

Open-ended

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Close-ended CIS

A

Once the initial tranche of money has been invested, the fund is closed to new money.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Open-ended CIS

A

New money can enter the fund, money can leave the fund as well.
E.g. Managers can create/cancel units in the fund as new money is invested/divested.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

4 Regulation aspects of CISs

A
  • Categories of assets held
  • Whether unquoted assets can be held
  • Maximum level of gearing
  • Any tax reliefs available
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

6 Features of Investment trust companies (ITCs)

A
  • Stated investment objectives
  • Funds are closed-ended
  • investors buy shares in an ITC, priced by supply and
    demand
  • Public companies, governed by company law
  • Gearing is allowed
  • Share price often stands at a discount to net asset
    value (NAV) although it can stand at a premium- Stated investment objectives
  • Funds are closed-ended
  • investors buy shares in an ITC, priced by supply and
    demand
  • Public companies, governed by company law
  • Gearing is allowed
  • Share price often stands at a discount to net asset
    value (NAV) although it can stand at a premium
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Key parties involved in ITCs

A
  • board of directors,
  • investment managers
  • shareholders
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

6 Key features of Unit Trusts

A
  • Stated investment objective
  • investors buy units in a UT, priced at a net asset value
    (NAV).
  • Funds are open-ended
  • They are trusts, governed by law
  • Limited power to use gearing (ie to borrow)
  • Guaranteed marketability
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Key parties in unit trusts

A
  • Trustees (eg insurance company or bank)
  • Investment managers (eg merchant bank)
  • unitholders
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Differences between ITCs and UTs

A
  • Shares in ITCs are often less marketable than the underlying assets, whereas the marketability of units in UTs are guaranteed by the managers
  • Some UTs (eg property) need to hold cash to maintain liquidity, which implies lower expected returns but greater price stability
  • ITCs can gear, leading to extra volatility. UTs have limited power to gear.
  • Increase volatility of ITCs implies higher expected return
  • May be possible to buy assets at less than NAV in an ITC
  • ITC shares are more volatile than underlying assets because of the size of any discount to NAV can change. Volatility of units in a UT should be similar to that of underlying assets.
  • May be uncertainty as to the true level of NAV per share of an ITC, especially if the investments are unquoted.
  • ITCs can invest in a wider range of assets than UTs
  • May be subject to different tax treatment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Advantages of indirect investment vs direct investment

A
  • Access to larger / more unusual investment
  • Economies of scale in the case of larger collective schemes
  • Discount to NAV - assets may be bought cheaply (ITCs only)
  • Diversification
  • Divisibility
  • Expected return higher due to the extra volatility associated with gearing
  • Expected return higher due to extra volatility associated with the discount to NAV
  • Expenses associated with direct investment avoided
  • Expertise of investment managers
  • Index-tracking of a quoted investment index is possible
  • Marketability may be better than that of underlying securities (although they may also be less marketable than the underlying assets)
  • Quoted prices, which make valuation easier
  • Tax advantages possible
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Disadvantages of collective investment schemes vs direct investment

A
  • Loss of control
  • Management charges incurred
  • Extra volatility caused by gearing/discount to NAV (ITCs only)
  • Tax disadvantages are possible
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Net asset value per share (NAV)

A

Company’s underlying assets divided by the number of shares.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Reasons for discounted NAV in ITC’s

A
  • Management charges
  • Concerns over marketability
  • Concerns over the quality of management
  • Market sentiment/fashion (out of fashion by investors)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Derivative

A

A financial instrument whose value is dependent on the value of another underlying asset.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Forward contract

A

-A contract to buy (or sell) an asset on an agreed basis
in the future.
-Non-standardised.
-Over-the-counter
-Credit risk dependent on the creditworthiness of the counterparty.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Futures contract

A

-A STANDARDISED contract, TRADED ON A
RECOGNISED EXCHANGE, to buy (or sell) an asset on
an agreed basis in the future.
-Liquid market due to a high amount of identical futures

18
Q

Functions of the exchange

A
  • Set the details of standardised contracts
  • Authorise who can trade on the exchange
  • Bring buyers and sellers together
  • Operate sub-institution called the clearing house.
19
Q

Options

A

Gives an investor the right - but not the obligation - to buy/sell a specified asset on a specified future date.

20
Q

Warrant

A

-Option issued by a company.
-The holder has the right to purchase shares at a
specified price at specified times in the future.
-Similar to a call option.
-Bond warrants do exist as well

21
Q

The long position in an asset

A

Means having a positive economic exposure to that asset.

22
Q

Short position in an asset

A

Having a negative economic exposure to that asset.

23
Q

Clearing house

A

-Self-contained institution whose only function is to
clear FUTURES trades and settle margin payments.
-The clearing house checks that the buy and sell orders
match
-Acts as a party to every trade.
-Guarantees each side of the original bargain, remove
credit risk. Uses initial and variation margins.

24
Q

Clearing house as a party to every trade

A

It simultaneously acts as if it had sold to the buyer and bought from the seller.
Following registration, each party has a contractual obligation to the clearing house.
In return, the clearing house guarantees each side of the original bargain, removing the credit risk to each of the individual parties

25
Q

Closing out position

A

By taking out an equal but opposite contract.
E.g. buy a 3-month future (the price of X will be paid) and 3 months later, just before delivery, sells identical future at price Y. Therefore the profit or loss is Y-X.

26
Q

3 Main reasons to hold foreign assets

A
  • Match liabilities in the foreign currency
  • To increase expected returns
  • Reduce risk by increasing the level of diversification
27
Q

How would foreign assets increase expected returns

A
  • strengthening currencies
  • higher risk or fast-growing economies
  • undervalued markets
28
Q

FUNDAMENTAL Drawbacks of Overseas Markets

A
  • Mismatch of domestic liabilities
  • Tax (withholding tax and possible double taxation)
  • The volatility of the currency (currency risk)
29
Q

PRACTICAL drawbacks of overseas investment

A
  • need an overseas CUSTODIAN
  • poorly REGULATED markets
  • additional ADMINISTRATION
  • possible lack of MARKETABILITY and liquidity
  • LANGUAGE problems
  • lack of good quality INFORMATION
  • restrictions on ownership of certain shares by FOREIGN investors
  • cost of obtaining EXPERTISE
  • possible TIME delays
  • problems REPATRIATING funds
  • different ACCOUNTING methods/standards
  • POLITICAL instability & risks (asset confiscation)

CRAM LIFE TRAP

30
Q

Indirect overseas investments include investments in:

A
  • MULTINATIONAL companies based in the home market
  • domestic companies with a substantial EXPORT trade
  • DERIVATIVES based on overseas assets.
  • Companies with INTERNATIONAL SUBSIDIARIES
  • (ITCs) COLLECTIVE INVESTMENT SCHEMES specialising in overseas investment
31
Q

Special characteristics of emerging markets

A

Can be very volatile (gives the investor chance of making very big gains/losses).

  • Can be affected by enormous flows of money generated by changes in investor sentiment.
  • Economies and markets of many smaller markets are less interdependent than those of major economic powers, resulting in good diversification.
32
Q

Factors to consider before investing in emerging markets

A
  • Current market VALUATION
  • range of companies available.
  • extent of additional DIVERSITY generated.
  • Possibility of high ECONOMIC GROWTH rate
  • degree of POLITICAL stability
  • RESTRICTIONS on foreign investment.
  • market REGULATION
  • STABILITY AND STRENGTH of the currency
  • EXPERTISE in the markets
  • availability and quality of INFORMATION.
  • COMMUNICATION problems
  • level of marketability
  • extra EXPENSES
33
Q

Matching liabilities in the foreign currency

A

For funds with domestic liabilities, the reasons for overseas investment depend on the effect that such investments have on the expected risk/return of the whole portfolio.

34
Q

Why may returns on overseas investments be higher than returns on domestic investments?

A
  • fair compensation for the higher risk involved
  • inefficiencies in the global market, allowing fund managers to find individual countries whose markets are undervalued.
35
Q

Diversification w.r.t. overseas investment

A
  • Investing in a number of different countries or economies with a low degree of correlation helps to reduce risk.
  • achieved by investing in industries that are not available for investment in the home market
  • gives a larger number of companies from which to construct a diversified portfolio.
36
Q

Withholding tax

A

tax deducted at source from dividends or other income paid to non-residents of a country.

37
Q

Double taxation agreement

A

Done between the domestic tax authorities and the particular overseas country, allowing for the domestic tax to be reduced/eliminated because of the overseas tax already paid.

38
Q

Advantages of investing in multinational companies based in the home market

A
  • EASY to deal in the familiar home market
  • better/increased ACCESS
  • companies will have EXPERTISE and tend to conduct their business in the most profitable areas overseas, including areas where direct investment may be difficult.
  • more MARKETABLE
39
Q

Disadvantages of investing in multinational companies based in the home market

A
  • such a company’s earnings might be DILUTED by domestic earnings
  • investor will have no CHOICES in where the company transacts its business.
40
Q

Emerging market

A

Stock markets in countries with developing economies.

- can offer high growth rates and possible market inefficiencies

41
Q

Attractions of investments in emerging markets

A
  • Current market valuation
    • inefficient markets
    • perceived to be risky
  • Rapid economic growth
  • Better diversification
42
Q

Drawbacks of investment in emerging markets

A
  • Volatility
  • Marketability
  • Political stability
  • Regulation of the stock market
    • insider trading by local investors
    • fraud
  • Restrictions on foreign investment
  • Communication problems and availability and quality of information

A311 (26 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions