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CISI - Portfolio Construction Theory in Wealth Management > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

What are the key characteristics of money?

A D D U L T

A
  • Acceptability
  • Divisibility
  • Durability
  • Uniformity
  • Limited Supply
  • Transportability
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2
Q

What’s the maximum yearly contribution to an ISA?

A

£20,000

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3
Q

What’s the maximum yearly contribution to an Lifetime ISA?

A

£4,000

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4
Q

What’s the maximum yearly contribution to an HTB ISA?

A

£200/m £2400/year

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5
Q

What’s the maximum yearly contribution to an JISA?

A

£9000

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6
Q

How much does the FSCS cover in the event of a bank insolvent?

A

£85,000

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7
Q

Whats the role of the Sterling OVerninght Index Average (SONIA)?

A

set interest rate that banks pay to borrow overnight from other fin institutions and institutional investors

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8
Q

Give 4 examples of money market instruments

T B C C

A
  • T-bills
  • Banker’s acceptances (BAs)
  • Certificates of Deposit (CDs)
  • Commercial Paper (CP)
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9
Q

What are banker’s acceptances?

A

short term credit investments issued by firms

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10
Q

What are certificates of deposits?

A

Time deposits with the bank

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11
Q

What are commercial papers?

A

Unsecured IOUs by large banks or corporations to meet their short-term financial obligations

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12
Q

What are T-Bills?

A

Money market securities issused and fully backed by the guarantees of a UK sovereign

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13
Q

What are the requirements for an asset to be risk-free?

A
  • No default risk
  • No reinvestment risk
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14
Q

Three different measures of inflation

A
  • CPI
  • RPI
  • PPI
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15
Q

What is offshore banking?

A

Banking in a different financial regulatory regime from one’s own country

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16
Q

What are the benefits of offshore banking?

A
  • multi currency accounts
  • services not available from domestic banks i.e. anonymous bank accounts
  • stable political/economical jurisdictions
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17
Q

What are the risks of offshore banking?

A
  • exchange rate risk
  • security of the institution
  • Home country clamping down on abuse re offshore finance
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18
Q

Tax implications of offshore banking

A
  • no tax / receive gross
  • need to declare income to HMRC
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19
Q

What is a bullet bond?

A

Single maturity date bond

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20
Q

What’s an iredeemable nond?

A

bond with no maturity date

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21
Q

What does it mean when a bond is redeemed at par value?

A

When nominal value of bond is redeemed at redemption date

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22
Q

What is a redeemable bond at a premium?

A

When bond redeemed at a premium to nominal value

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23
Q

When can dual-dated bonds be redeemed?

A
  • When the issuing company calls the bond
  • The latest redeemable date
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24
Q

What is a convertible bond?

A

When there is option to covert bonds into ordinary shares at redemption date

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25
Q

What is a floating rate security?

A

When coupons change depending on external reference rate i.e. interbank rates

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26
Q

Whats in index linked bond?

A

When maturity value and coupon are linked to a specific inflation index

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27
Q

Who issues bonds?

A
  • Sovereign governments
  • Local authorities
  • Companies
  • Supranational bodies i.e. IMF and the World Bank
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28
Q

What is the nominal yield?

A

The quoted coupon rate of a particular issue

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29
Q

What is the current yield?

A

The current income from a coupon as a percentage of its price (C/P)

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30
Q

What is the gross redemption yield (GRY) or yield to maturity (YTM)?

A
  • the expected rate of return if bond held to maturity
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31
Q

What are the two assumptions in GRY or YTM?

A
  • bond held to maturity
  • all coupons reinvested at the promised yield
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32
Q

What is the promised yield to call

A

Expected rate of return for a bond held to the first call date

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33
Q

What is the Realised (horizon) yield

A

the expected rate of return for a bond that is likely to be sold at some date before the bond matures

34
Q

What determines GRY of a bond

C L E R T

A
  • Credit risk
  • Liquidity premium
  • Expected rate of inflation
  • Real risk-free rate
  • Term premium
35
Q

Give three economic factors that can impact ona rise in the GRY

A
  • Increase in real growth rate
  • Tight monetary credit conditions
  • a rise in expected inflation
36
Q

What are risks of bonds?

C I L I F

A
  • Credit
  • Interest and Inflation
  • Liquidity
  • Issue specific
  • Fiscal and Currency Risk
37
Q

For bonds, what is credit risk?

A

issuer defaults on obligation to pay coupons and repay principal

38
Q

For bonds, what is interest rate risk and inflation risk? (3)

A
  • inverse relationship between bond price and yields
  • if interest and inflation go up
  • price go down
39
Q

What is liquidity risk for bonds?

A

The harder to sell the more risky the bond is perceived

40
Q

What is Fiscal and Currency Risk for bonds?

A
  • Tax might increase
  • risk that purchasing power decrease because of change in currency conversion rate
41
Q

For bonds, what is issue-specific risk?

A
  • issue specific to bond
  • i.e. right to call for early redemption
42
Q

What are two types of active bond management?

A
  • Interest rate anticipation
  • Yield curve positioning
43
Q

What is interest rate anticipation?

A
  • forecasting interest rate
44
Q

Give three different types of yield curve positioning

A
  • Barbells and bullets
  • Ladders
  • Riding the yield curve
45
Q

What is a barbell bond portfolio (2)

A

allocate funds to short and long dates

lowest allocations to intermediate securities

46
Q

What is a bullet portfolio?

A

concentrated position on similar dates

typically intermediate date bonds

47
Q

What is a ladder portfolio?

A

equally spreading out investments accross maturities

48
Q

What is a pure yield pickup swap?

A

swap low coupon to comparable high coupon bond

49
Q

What other bonds can be used for diversification? (2)

A
  • High yield bonds
  • International bond
50
Q

Advantage of high yield bonds

A

higher yield

51
Q

Risk of high yield bonds

A

higher credit risk

more likely to default

52
Q

Which bond has a higher correlation to equities?

Investment grade or high yield

A

High yield

53
Q

Why is high yield more correlated to equities

A

closely linked to economic performance of company in question

54
Q

Why does international bonds help with diversification?

A

lower correlation to domestic bond because of mismatch in economic cycles

55
Q

What is an equity?

A

A share of ownership in a company

56
Q

Three Characteristics of preference shares

A
  • pay a fixed rate of dividend
  • No security attach
  • No voting rights
57
Q

Two main motivations for buying shares

A
  • income from dividends
  • capital gains
58
Q

What are the advantages of electronic platforms for buying and selling shares? (3)

A
  • monitor investments any time
  • lower dealing costs
  • out of hours orders
59
Q

Why does an increase in interest rates cause share prices to fall?

A
  • Alternative investments, i.e. government bonds will become more attractive
  • Higher costs of borrowing will dampen economic activity
60
Q

Three common passive equity approaches?

A
  • Buy and hold
  • Indexation
  • rebalancing
61
Q

what is a buy and hold strategy?

A
  • buying a portfolio of securities and holding them for a long period of time
62
Q

For passive strategies, what is indexation?

A
  • When a portfolio is made to perform the same as a benchmark
63
Q

What is full replication? (2)

A
  • hold all constituents of an index
  • weighted according to relevant market proportions
64
Q

What is stratified sampling portfolio? (3)

A
  • used when full replication is not possible/difficult to obtain
  • hold a sample of securities
  • representative of primary characteristics of that index
65
Q

For passive strategies, what is rebalancing?

A
  • Realigning weightings of portfolio
  • Do it periodically
  • Weightings change as prices move
66
Q

If bond yield curve is flat or inverted, what equity investment strategy outperforms?

A
  • Growth style stocks and indices
67
Q

If bond yield curve is flat to steeper, what equity investment strategy outperforms?

A
  • Value stocks
68
Q

What are the three categories of commodities?

A
  • Hard commodities
  • Energy commodities
  • Soft commodities
69
Q

What is included in hard commodities?

A

metals and diamonds

70
Q

What is included in energy commodities?

A

Crude oil and natural gas

Biofuels

71
Q

What is included in soft commodities?

A
  • Agricultural products inc. wool, coton and foodstuffs
72
Q

Are soft commodities perishable?

A

Yes

73
Q

What other factors can affect supply of soft commodities? (4)

A
  • Good/poor harvests
  • disease affective livestock
  • exceptionally good/bad weather
  • political unrest in producing country
74
Q

What are the direct ways to invest in commodities? (2)

A
  • cash market
  • futures market
75
Q

Main three characteristics of buying commodities in cash market?

A
  • Usually used by user of commodity
  • immediate delivery
  • Possible to use London Metal Exchange (LME) for non-deteriorating commodities
76
Q

What is a futures contract? (3)

A
  • An agreement to buy or sell
  • a standard quantity of a specified asset
  • on a fixed future date at a a price agreed today
77
Q

What are the four Characteristics for a future contract

A
  • Standardised quantity
  • Homogenous and specified asset
  • Fixed future date
  • Price agreed today
78
Q

What are the advantages of direct commodity investment? (2)

A
  • diversification, historically different rreturn from other asset classes
  • hedge against inflation
79
Q

What are the disadvantages of direct commodity investment? (3)

A
  • leverage magnifies loss
  • very volatile
  • volatility influenced by macroeconomic factors
80
Q

What are the advantages of indirect commodity investment? (5)

A
  • low correlation with bonds
  • ETCs very liquid
  • funds pay dividends
  • low holding/storage costs
  • min dealing size more manageable
81
Q

What are the four disadvantages of indirect commodity investment?

A
  • Exchange traded commodities does not give access to entire commodity market
  • only tracks small handful of commodities
  • funds may invest in companies not the commodity
  • not the same as owning the commodities
82
Q

What are the three different types of commercial property?

A
  • Retail
  • Offices
  • Industrial

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

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