Chapter 9: Investment Management Flashcards
How is Expected Return Calculated?
Taking the probability of each scenario and multiplying them by the Scenario Return.
What are the Main 9 Risk Types?
think hard
- Market or Systematic Risk
- Inflation Risk
- Interest Rate Risk
- Reinvestment Risk
- Exchange rate risk
- Political and legal risk
- Regulatory Risk
- Default Risk
- Liquidity Risk
What is Forward-looking Risk Analysis?
forcasts probabilites and asses the liklehood of each possible state of the world occuring and estimare the returns and values arising given that particular outcome.
What is Backward-looking Risk Analysis?
Studying historically observed returns and associated freqeuncies on the assumption that this past data will be representative of the future.
Are Equities considered risky?
Yes.
What is the Equity Risk Premium and How is it Calculated?
A higher rate of return that is required to entice investors to take on the risk of owning shares.
If the total return of a stock is 10%, and the risk free rate is 4% the equity risk premium is 6%.
What are the Benefits of Money Market Instruments?
What is also wrong with them?
For investors that do not want their money tied up for long periods, they are predictable and very liquid.
They however do not provide great scope for capital growth.
What is the desire to move into government issued short term paper in times of terror known as?
Flight to safety
What makes fixed-income securities attractive?
The security and regular pre determined coupons
When might capital loss be incurred from fixed income securities?
If the issuer defaults or the bond is sold when the value is below the nomial before maturity.
How do Equities, commodities and Property cope with Inflation?
Relatively well as they can adjust their prices.
What is Classified Investment Grade ? Ratings Above
BBB for Fitch and S&P or Baa for Moodys
What can occur if a ratings agency changes the rating of the bond? for the holder
They can demand a greater coupon for the now greater risk incurred.
What is Credit Enhancement?
It is where a bonds will receive a sovereign guarantee (or some other form) thus reducing credit risk and boosting the bonds rating.
What are the Risks Associated with Overseas Equities and Bonds?
Currency Risk and Political and legal risks.
What does risk holding not perfectly positively correlated assets in a portfolio remove?
Unsystematic risk
How is diversification maximised?
By holding investments with uncorrelated returns, this does not need to be investments that are uncorrelated
What risk cannot be diversified away?
Market and systematic risk
What is one of the key issues when hedging with futures contracts?
Knowing when to enter and exit the trade
Will seperate accounts generally be required for future hedges?
yes due to operational considerations
What is the risk taken by the purchaser of the put?
The premium of the option
What are Contract for Differences?
Is a contract (derivative) that allows an individual to benefit of the price movement without actually owning the underlying asset/
Are CFDs margin traded?
Yes. These are geared positions that mean the investor does not need to invest the full amount of capital.
Is commission paid on CFDs?
Yes
Are CFDS risky, why?
Because an adverse price movement can warrant heavy margin calls, which can impact the value of the position it is aiming to hedge.
What are the 2 types of margin traded on a CFD?
* Initial Margin: normally between 5 and 30% for shares and 1% for indicies and FX
*Variance or Maintenance Margin: The CFD will be marked to the market at currently prevailing prices and if the position has moved beyond the amount taken as initial margin - additional margin would be required.
What is the Liquidation Preference?
The amount that must be paid to preference shareholders, such as venture capital ot angel investors, before distibutions can be made to common stock holders.