CISI Risk - Chapter 6 Flashcards
What is nominal returns
Returns unadjusted for inflation
What are Real Returns
Returns after stripping out inflation
Nominal return equation?
(1+ Real Rate of Return) X (1+inflation rate) = 1+ Nom rate of return
Real Return equation
1+Nominal Rate
————————- = 1 + Real Rate
1+Inflation Rate
What are total returns
Income + asset value
Holding period returns
Total return over a time period
What are the four components to Property risk
Location
Effect of the use
Credit worthiness of tenants
Length of lease
What does Low standard deviation imply?
Low risk
What is compounded interest
Interest earned by keeping it in the asset, instead of withdrawing to spend/invest elsewhere
What is the compounded interest formula
S = X (1 + r)^n
What asset class has returned the most since 2011?
Equities
Even though equities returned the highest % return since 1980, why might cash deposits be a better investment?
Lower Volatility
If the US dollar fluctuates on the US stock market - What type of risk is this
Market risk
If the US dollar fluctuates on the GBP value, what type of risk is?
Currency
What is interest rate risk?
Interest rates move against the investor
What is issuer risk
Firm of the seller of bonds or other loans/investments collapses during holding
What market are bonds traded on?
Secondary
2 Advantages of fixed income bonds?
Coupons are paid before equity dividends.
Bond dividends are consistant
Another Advantage of bonds over equites
Higher place in the “Pecking Order” if the issuer defaults
Bonds play a useful role in portfolios for investors who need: (3)
Secure home for their funds
Dependable level of income
Source of future funds for upcoming future cost
What is Sovereign risk
Governments defaulting on loans
What is a disadvantage of alpha measurement?
Does not include fees and fund manager losses due to incompetence
If an asset has a beta factor of 1, how will it compare to the market?
Moves in-line with the benchmark
If an asset has a beta factor of more then 1, how will it compare to the market
Moves higher then the benchmark
If an asset has a beta factor of less then 1, how will it compare to the market?
Moves lower then the benchmark
What is the alpha measurement?
over-performance against its benchmark.
Ie difference between expected reruns and real returns
What is the Sharpe Ratio?
Return of portfolio using the risk free rate
Equation for Sharpe Ratio?
Standard deviation of portfolio
What is the Information Ratio?
Excess return achieved by a fund, compared to the tracking error
What is a Tracking Errorq
The standard deviation of returns relative to a benchmark
Equation for Information Ratio?
Standard deviation of excess return from benchmark
What does a high information ratio tell us?
Succesful fund manager
Is venture capital liquid or illiquid?
Illiquid
Is Private Equity liquid or illiquid?
illiquid
What is Venture capital
Investing in start up business, with the aim of building value and then selling on
What is Private Equity
Investing in firms not listed on the market
Who is an investment mandate set out by?
Investment management company
10 Features of an investment mandate
Funds aim
Strategy
Geographical location of investments
Types of securities
Short selling or not
Geared or not
Benchmark intends to better
Max tracking error
Restrictions if any
Difference between diversification and hedging?
Diversification = Risks are uncorrelated
Hedging = Negative correlations
What is short selling?
Selling a security you do not own, in anticipation of its price reducing so you can buy it back for less then you sold it for.
Who challenges the investment managers?
Dedicated investment management committe
4 main areas where a portfolio will benefit from monitoring, management and reporting.
Peer review with other fund managers
Risk review with independent managers in the firm
Monitoring for mandate compliance
Performance attribution reporting
What is attribution reporting
Fund manager, identifing P/L areas in portfolio
What is RI?
Responsible Investment
Which portfolio risk can be diversified away, systemic or non-systemic?
Non-Systemic
