CISI Risk - Chapter 6

Question 1

What is nominal returns

Answer 1

Returns unadjusted for inflation

Question 2

What are Real Returns

Answer 2

Returns after stripping out inflation

Question 3

Nominal return equation?

Answer 3

(1+ Real Rate of Return) X (1+inflation rate) = 1+ Nom rate of return

Question 4

Real Return equation

Answer 4

1+Nominal Rate
————————- = 1 + Real Rate
1+Inflation Rate

Question 5

What are total returns

Answer 5

Income + asset value

Question 6

Holding period returns

Answer 6

Total return over a time period

Question 7

What are the four components to Property risk

Answer 7

Location
Effect of the use
Credit worthiness of tenants
Length of lease

Question 8

What does Low standard deviation imply?

Answer 8

Low risk

Question 9

What is compounded interest

Answer 9

Interest earned by keeping it in the asset, instead of withdrawing to spend/invest elsewhere

Question 10

What is the compounded interest formula

Answer 10

S = X (1 + r)^n

Question 11

What asset class has returned the most since 2011?

Answer 11

Equities

Question 12

Even though equities returned the highest % return since 1980, why might cash deposits be a better investment?

Answer 12

Lower Volatility

Question 13

If the US dollar fluctuates on the US stock market - What type of risk is this

Answer 13

Market risk

Question 14

If the US dollar fluctuates on the GBP value, what type of risk is?

Answer 14

Currency

Question 15

What is interest rate risk?

Answer 15

Interest rates move against the investor

Question 16

What is issuer risk

Answer 16

Firm of the seller of bonds or other loans/investments collapses during holding

Question 17

What market are bonds traded on?

Answer 17

Secondary

Question 18

2 Advantages of fixed income bonds?

Answer 18

Coupons are paid before equity dividends.
Bond dividends are consistant

Question 19

Another Advantage of bonds over equites

Answer 19

Higher place in the “Pecking Order” if the issuer defaults

Question 20

Bonds play a useful role in portfolios for investors who need: (3)

Answer 20

Secure home for their funds
Dependable level of income
Source of future funds for upcoming future cost

Question 21

What is Sovereign risk

Answer 21

Governments defaulting on loans

Question 22

What is a disadvantage of alpha measurement?

Answer 22

Does not include fees and fund manager losses due to incompetence

Question 23

If an asset has a beta factor of 1, how will it compare to the market?

Answer 23

Moves in-line with the benchmark

Question 24

If an asset has a beta factor of more then 1, how will it compare to the market

Answer 24

Moves higher then the benchmark

Question 25

If an asset has a beta factor of less then 1, how will it compare to the market?

Answer 25

Moves lower then the benchmark

Question 26

What is the alpha measurement?

Answer 26

over-performance against its benchmark. Ie difference between expected reruns and real returns

Question 27

What is the Sharpe Ratio?

Answer 27

Return of portfolio using the risk free rate

Question 28

Equation for Sharpe Ratio?

Answer 28

SR = return on portfolio - risk free return ------------------------------------------------------------------ Standard deviation of portfolio

Question 29

What is the Information Ratio?

Answer 29

Excess return achieved by a fund, compared to the tracking error

Question 30

What is a Tracking Errorq

Answer 30

The standard deviation of returns relative to a benchmark

Question 31

Equation for Information Ratio?

Answer 31

IR = Mean of excess returns ---------------------------------------------------------- Standard deviation of excess return from benchmark

Question 32

What does a high information ratio tell us?

Answer 32

Succesful fund manager

Question 33

Is venture capital liquid or illiquid?

Answer 33

Illiquid

Question 34

Is Private Equity liquid or illiquid?

Answer 34

illiquid

Question 35

What is Venture capital

Answer 35

Investing in start up business, with the aim of building value and then selling on

Question 36

What is Private Equity

Answer 36

Investing in firms not listed on the market

Question 37

Who is an investment mandate set out by?

Answer 37

Investment management company

Question 38

10 Features of an investment mandate

Answer 38

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

Question 39

Difference between diversification and hedging?

Answer 39

Diversification = Risks are uncorrelated Hedging = Negative correlations

Question 40

What is short selling?

Answer 40

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.

Question 41

Who challenges the investment managers?

Answer 41

Dedicated investment management committe

Question 42

4 main areas where a portfolio will benefit from monitoring, management and reporting.

Answer 42

Peer review with other fund managers Risk review with independent managers in the firm Monitoring for mandate compliance Performance attribution reporting

Question 43

What is attribution reporting

Answer 43

Fund manager, identifing P/L areas in portfolio

Question 44

What is RI?

Answer 44

Responsible Investment

Question 45

Which portfolio risk can be diversified away, systemic or non-systemic?

Answer 45

Non-Systemic