Chapter 9 Investment Management Flashcards
Systematic risk
Economic, political global factors
Unsystematic risk
Specific to company and can be reduced with diversification
Rank securities from high to low risk
Leveraged securities (Warrants/etf)
equities
collective investment schemes
corporate bonds
government bonds
bank accounts
What is a future
an agreement to buy or sell an asset on a fixed future date for a price agreed today
What does long and short mean
Long means you own asset- hope price rises
Short means you need asset - hope price falls
What is a option
Gives the holder the right to buy (call) or sell (put) an asset on or before a fixed future at a fixed price.
Holder pays a premium to get these rights
What is CFD
Cash settled derivative giving exposure to returns on asset without ownership of asset
They are margin traded
Hedging strategy for long underlying position
Short future
Long put
CFD: short position
Hedging strategy for short underlying position
Long future
Long call
CFD: Long position
List active portfolio management strategies
Anomaly switching
Policy switching
Inter market switching
Riding the yield curve
List passive portfolio management strategies
- Cash matching/dedicated portfolio
- Duration matching/ immunisation
What is anomaly switching
Exploiting mispricing in the bond market
what is intermarket switching
Trading on spread between bond and its benchmark
What are cash matched/dedicated portfolios
Matching cash flows of bonds to liabilities (dont reinvest)
what is duration matching/immunisation
Match duration of bonds to liabilities
What is ladder immunisation
A variety of bonds with different durations either side of the liability- weighted average duration is same as liability
What is bullet immunisation
Bonds with durations close to timing of the liability
Who has risky long term profile
Life assurance fund and pension fund
Who has low risk short term profile
general insurance fund and bank
Who has high risk short term profile
Hedge fund
What is PIP
Primary info provider
An investor wants to hedge a short equity position as she believes that the stock price will rise thereby incurring a loss on her positions. Which of the following is the best strategy to adopt?
Long-futures
An investor holds an asset. In order to hedge, they should
Buy puts
A large fire destroys a company’s warehouse and this, in turn, causes the company’s share price to fall. This is an example of:
Unsystematic risk
Which of the following institutions would be most interested in assets that are highly-liquid and low-risk?
Home insurance company
Which of the following investments are regarded as being very high-risk?
Buying or selling futures
Its more risky than options and warrants
Which one of the following is the best description of anomaly switching?
Moving between two bonds similar in all respects apart from the yield and price at which each trades.
A bank is seeking to hedge a short-term exposure to interest rates using a standardised, liquid, low-cost contract. Which of the following would be best?
A short-term interest rate future
A swap would not be used short-term. Exchange-traded STIR futures generally provide a cheaper hedge than options because there is no upfront premium.
A rise in inflation would benefit:
A borrower
Which of the following is TRUE in respect of passive fund management relative to active fund management?
Fewer trades
An investor owns a large portfolio of UK equity but now has a very bearish attitude to the markets. What would you recommend to them if they are a very high risk investor?
Sell futures and buy puts on the market
Which of the following would a charity find most useful?
Gross redemption yield
Charities do not pay tax and hold bonds in the long-term.
