Chapter 9 Investment Management

Question 1

Systematic risk

Answer 1

Economic, political global factors

Question 2

Unsystematic risk

Answer 2

Specific to company and can be reduced with diversification

Question 3

Rank securities from high to low risk

Answer 3

Leveraged securities (Warrants/etf)
equities
collective investment schemes
corporate bonds
government bonds
bank accounts

Question 4

What is a future

Answer 4

an agreement to buy or sell an asset on a fixed future date for a price agreed today

Question 5

What does long and short mean

Answer 5

Long means you own asset- hope price rises

Short means you need asset - hope price falls

Question 6

What is a option

Answer 6

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

Question 7

What is CFD

Answer 7

Cash settled derivative giving exposure to returns on asset without ownership of asset

They are margin traded

Question 8

Hedging strategy for long underlying position

Answer 8

Short future
Long put
CFD: short position

Question 9

Hedging strategy for short underlying position

Answer 9

Long future
Long call
CFD: Long position

Question 10

List active portfolio management strategies

Answer 10

Anomaly switching
Policy switching
Inter market switching
Riding the yield curve

Question 11

List passive portfolio management strategies

Answer 11

• Cash matching/dedicated portfolio
• Duration matching/ immunisation

Question 12

What is anomaly switching

Answer 12

Exploiting mispricing in the bond market

Question 13

what is intermarket switching

Answer 13

Trading on spread between bond and its benchmark

Question 14

What are cash matched/dedicated portfolios

Answer 14

Matching cash flows of bonds to liabilities (dont reinvest)

Question 15

what is duration matching/immunisation

Answer 15

Match duration of bonds to liabilities

Question 16

What is ladder immunisation

Answer 16

A variety of bonds with different durations either side of the liability- weighted average duration is same as liability

Question 17

What is bullet immunisation

Answer 17

Bonds with durations close to timing of the liability

Question 18

Who has risky long term profile

Answer 18

Life assurance fund and pension fund

Question 19

Who has low risk short term profile

Answer 19

general insurance fund and bank

Question 20

Who has high risk short term profile

Answer 20

Hedge fund

Question 21

What is PIP

Answer 21

Primary info provider

Question 22

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?

Answer 22

Long-futures

Question 23

An investor holds an asset. In order to hedge, they should

Answer 23

Buy puts

Question 24

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:

Answer 24

Unsystematic risk

Question 25

Which of the following institutions would be most interested in assets that are highly-liquid and low-risk?

Answer 25

Home insurance company

Question 26

Which of the following investments are regarded as being very high-risk?

Answer 26

Buying or selling futures Its more risky than options and warrants

Question 27

Which one of the following is the best description of anomaly switching?

Answer 27

Moving between two bonds similar in all respects apart from the yield and price at which each trades.

Question 28

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?

Answer 28

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.

Question 29

A rise in inflation would benefit:

Answer 29

A borrower

Question 30

Which of the following is TRUE in respect of passive fund management relative to active fund management?

Answer 30

Fewer trades

Question 31

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?

Answer 31

Sell futures and buy puts on the market

Question 32

Which of the following would a charity find most useful?

Answer 32

Gross redemption yield Charities do not pay tax and hold bonds in the long-term.