Chapter 6: Portfolio Construction and Planning Flashcards
Which of the following is TRUE regarding synthetic risk and reward indicators (SRRI)?
I. UCITS IV requires a SRRI score to be part of the KIID for all UCITS funds
II. SRRI scores range from 1 to 7, with 1 representing the most risky fund, and 7 representing the least risky fund
III. SRRI is based on the historic volatility of the NAV of the fund over a 10 year period
IV. Historic volatility of more than 25% corresponds to a SRRI score of 7
A. I, II only
B. II, III only
C. I, II, IV only
D. I, IV only
D. I and IV only.
A SRRI score of 1 indicates the lowest risk level, and a score of 7 indicates the highest risk level.
SRRI is based on historic volatility over a 5 year period.
Which of the following is NOT a passive bond strategy?
A. Cash matching
B. Ladder portfolio
C. Immunisation
D. Enhanced indexing
D. Enhanced indexing is a semi-active strategy.
Which of the following is an assumption of Modern Portfolio Theory?
A. Investors are loss averse
B. Investors are risk averse
C. Investors are risk takers
D. Investors are risk avoiders
B. Investors are risk averse.
MPT assumes investors are risk averse meaning they need to be compensated with return for taking on risk.
An analyst is using known probabilities to forecast future outcomes. It is most likely that they are using a … approach.
A. Stochastic
B. Statistical
C. Deterministic
D. Brownian
C. Deterministic.
Deterministic approaches uses known parameters and probabilities. Stochastic approaches allow for unknown, random variables.
Malcolm is talking about the reduction in yield figure. He makes the following comments:
Comment 1: RIY considers annual management charges
Comment 2: RIY does not include any initial charges
Which is true?
A. Both
B. Comment 1 only
C. Comment 2 only
D. Neither
B. Comment 1 only.
Both the initial charge and the annual management charge are included in the reduction in yield figure.
RIY shows the impact of ALL charges (initial and ongoing) on the investor’s return, so it shows the gross return.
Which of the following is not a stage in top down active management?
A. Currency selection
B. Asset allocation
C. Sector allocation
D. Stock selection
A. Currency selection.
The three stages in top down active management are: asset allocation, sector allocation and stock selection.
Which of the following is TRUE regarding performance by active fund managers and active share?
A. A link exists between outperformance and low active share
B. A link exists between outperformance and high active share
C. No link exists between outperformance and high active share
D. No link exists between underperformance and high active share
B. A link exists between outperformance and high active share.
Active share looks to compare the stock weights of the manager to that of the benchmark. It is seen as an improvement on traditional tracking error analysis, and will more easily reveal if the manager is just a “closet-tracker”.
Which of the following is the LEAST important when discussing an investment of 20K, which may be needed soon for an illness?
A. Penalties
B. Taxation
C. Capital loss
D. Liquidity
B. Taxation of the returns is a secondary consideration, as the investment is not likely to be held for very long.
The question is asking about very short-term investments: i.e. where the funds may be needed very soon. It is, therefore, important to avoid investments that have penalties for withdrawing at short notice or that could incur capital losses. It is also important to have adequate liquidity.
How does a smart beta fund differ from a traditional passive fund?
A. A percentage of the portfolio is actively managed, and the rest is passively held
B. The fund over weights and under weights constituents of the index
C. The fund enhances return by charging fees for stock lending
D. The fund creates its own benchmark based on active research, and then matches that benchmark
D. The fund creates its own benchmark based on active research and then benchmarks that fund.
The creation of the benchmark is an active strategy, and the tracking of the benchmark is the passive strategy.
Which of the following is NOT used in fundamental analysis?
A. Price patterns
B. Dividend cover
C. Management information
D. Cash flows
A. Price patterns are associated with technical analysis.
Technical analysis concerns price patterns.
Fundamental analysis concerns the intrinsic value of the security - fundamental analysis is more likely to take advantage of the other measures.
A true bottom up active fund is characterised by which risk?
A. Tracking error
B. Concentration risk
C. Beta risk
D. Liquidity risk
A. Tracking error characterises a true bottom up active fund’s strategy.
