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PCIAM > Chapter 6 > Flashcards

Chapter 6 Flashcards

1
Q

What is a suitability report?

A

A suitability report is a written document that explains why and how a particular product has been recommended

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2
Q

What are the 6 key things that needs to be in a suitability report?

A

It must be tailored to the customer
It needs to highlight associated risks
It needs to explain costs, charges, and potential penalties
It needs to confirm the clients attitude to risk and capacity fr loss
It needs to provide a balanced view
It needs to emphasise how the customer will be advantaged or disadvantaged by the advice

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3
Q

What are the 9 types of investment risk?

A
  • Default risk
  • Liquidity risk
  • Inflation risk
  • Interest rate risk
  • Systematic risk (market risk)
  • Unsystematic risk (Specific risk)
  • Foreign currency risk
  • Concentration risk
  • Overlap risk
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4
Q

What are three assets that can be used as inflation hedges?

A
  • Index-linked bonds
  • Infrastructure
  • Equities
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5
Q

What are the two types of monetary policies that aim to control inflation via interest rates?

A

Contractionary policies increase the interest rate to encourage saving and discourage spending) and expansionary policies decrease interest rates to encourage spending and discourage saving)

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6
Q

Before enteringinto an agreement or providing any service relating to designated investment business for a retail client, what must a firm provide?

A
  • The key terms of any such agreement
  • Information about the firm and its services, including information on communications, conflicts of interests and authorised status
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7
Q

What mediums can the client agreement for designated investment business be issued in?

A

It can be issued in any durable medium

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8
Q

How long does a company have to keep a record of client agreements?

A

The longer of five years or the duration of the relationship with the client.

Indefinitely if it was a pension transfer, conversion, pension opt-outs or free standing additional voluntary contributions (FSAVC)

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9
Q

Which set of regulations covers data protection?

A

Data protection Act 2018

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10
Q

Which set of regulations covers GDPR?

A

Data Protection Act 2018

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11
Q

What kind of data does GDPR apply to?

A

Personal data that includes personal identifiers

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12
Q

What are personal identifiers under GDPR?

A

Information in respect of a living individual who can be identified from the infomration held by the data controller

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13
Q

What is sensitive data under GDPR?

A

This is data covering a persons racial or ethnic origin, religious, political or other veliefs, mental or physical health, secual oriantation or criminal record.

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14
Q

What is a data subject under GDPR?

A

THe individual whose personal data is held

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15
Q

What is a data controller under GDPR?

A

THis is the person who decides the circumstances in which personal data should be processed

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16
Q

What is a data processor under GDPR?

A

This is a body (usually an organisation) that actually processes the data on behalf of the data controller

17
Q

What are the fees for GDPR breaches?

A

Unlimited fines and penal/informative notices issued by the commissioner

18
Q

What are examples of direct investment fees?

A

Stamp duty, SDRT, stockbroker fees

19
Q

What are examples of indirect investment fees?

A

Initial charges, annual charges, performance fees, and exit charges

20
Q

What are the 5 types of indexation?

A

Full replication - Buy all shares in the index
Sampling - take a sample that is most relevant from the index
Factor matching - find factors that drive the index and invest in assets that match these factors
Optimisation - Buying the securities in an index that provide the most representative sample of the index based on correlations, exposure and risk
Synthetic - When we are synthetically replicating the index through using derivatives)

21
Q

What is liability driven investing?

A

This is when we invest to meet a liability in the future. Often normal in insurance.

22
Q

What is “life-styling” investing?

A

This is the type of investment we often find in pension portfolios. This is where we change the balance of assets as a client gets older and needs less risk

23
Q

What is an enhanced index fund?

A

This is when an index fund is combined with some quantitave factors that helps improve the index

24
Q

What Is the 130-30 Strategy?

A

he 130-30 strategy, often called a long/short equity strategy, refers to an investing methodology used by institutional investors. A 130-30 designation implies using a ratio of 130% of starting capital allocated to long positions and accomplishing this by taking in 30% of the starting capital from shorting stocks.

25
Q

What are the three key investment strategies within ESG?

A

Socially

26
Q

What is socially responsible investing?

A

This is similar to ESG, except that SRI is driven first by investors individual values rather than investment potential

27
Q

What is impact investing?

A

This refers to investment into companies to generate a positive environmental or social impact alongside a financial return

28
Q

What is ethical investing?

A

Selecting investments based on ethical and moral principles

29
Q

What is the difference between negative screening and positive screening?

A

Negative screening we exclude undesirable stock and in positive screening we include desirable. Said differently, in negative screening we include neutral stocks, but in positive screening we exclude neutral stocks.

30
Q

What is responsible and sustainable investing?

A

This is an umbrella term that covers ESG (Environmental, Social, and Governance)

31
Q

What is the difference between “responsible and sustainable investing” and “socially responsible investing”?

A

“Responsible and sustainable investing” is about maximising returns whilst also trying to maximise benefits for society but for “socially responsible investing” the investor values comes first before returns.

32
Q

What are the advantages of direct investment? (There are 6)

A
  • Low costs of switching investment managers
  • The portfolio can be tailored to accomodate the investors requirement
  • It is easier to exclude holdings in specific stocks
  • Greather transparency of costs
  • Exceptions/reliefs can be used to offset capital gains made that are subject co CGT
  • Larger portfolios can enjoy an economy of scale and lower expense ratios that can be achieved via collective investments.
33
Q

What are the advantages of collective investment schemes? (There are 5)

A
  • Wide variety of funds available
  • Spread of risks can be achieved, even for small investors
  • Specialised CIS can give exposure to specific markets or sectors that might otherwise be inaccessible
  • No CGT on gains realised within a CIS
  • VAT not payable on the annual charges levied within the fund
34
Q

What are the disadvantages of Collective investment schemes? (There are 4)

A
  • Further management fees are payable on top of initial and annual management charges
  • Changes to the portfolio cound be expensive due to the often found bid-offer spreads
  • Little direct involvement from investors
  • Higher costs could be incurred upon changing investment managers
35
Q

What is pound cost averaging?

A

This is an investment strategy where you put in a given amount at a certain time over time

36
Q

Why is average cost higher than average price with pound cost average?

A

It isn’t Average cost is lower than average price as we are using an harmonic mean for the average cost and a arithmetic mean for the average price.

37
Q

If a question asks for the “Average prevailing price” which mean do we use?

A

Arithmetic mean

38
Q
A

PCIAM (7 decks)

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