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CISI Cards - Risk in Investment > CISI Risk - Chapter 6 > Flashcards

CISI Risk - Chapter 6 Flashcards

1
Q

What is nominal returns

A

Returns unadjusted for inflation

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2
Q

What are Real Returns

A

Returns after stripping out inflation

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3
Q

Nominal return equation?

A

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

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4
Q

Real Return equation

A

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

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5
Q

What are total returns

A

Income + asset value

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6
Q

Holding period returns

A

Total return over a time period

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7
Q

What are the four components to Property risk

A

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

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8
Q

What does Low standard deviation imply?

A

Low risk

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9
Q

What is compounded interest

A

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

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10
Q

What is the compounded interest formula

A

S = X (1 + r)^n

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11
Q

What asset class has returned the most since 2011?

A

Equities

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12
Q

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

A

Lower Volatility

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13
Q

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

A

Market risk

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14
Q

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

A

Currency

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15
Q

What is interest rate risk?

A

Interest rates move against the investor

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16
Q

What is issuer risk

A

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

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17
Q

What market are bonds traded on?

A

Secondary

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18
Q

2 Advantages of fixed income bonds?

A

Coupons are paid before equity dividends.
Bond dividends are consistant

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19
Q

Another Advantage of bonds over equites

A

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

20
Q

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

A

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

21
Q

What is Sovereign risk

A

Governments defaulting on loans

22
Q

What is a disadvantage of alpha measurement?

A

Does not include fees and fund manager losses due to incompetence

23
Q

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

A

Moves in-line with the benchmark

24
Q

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

A

Moves higher then the benchmark

25
Q

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

A

Moves lower then the benchmark

26
Q

What is the alpha measurement?

A

over-performance against its benchmark.

Ie difference between expected reruns and real returns

27
Q

What is the Sharpe Ratio?

A

Return of portfolio using the risk free rate

28
Q

Equation for Sharpe Ratio?

A

Standard deviation of portfolio

29
Q

What is the Information Ratio?

A

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

30
Q

What is a Tracking Errorq

A

The standard deviation of returns relative to a benchmark

31
Q

Equation for Information Ratio?

A

Standard deviation of excess return from benchmark

32
Q

What does a high information ratio tell us?

A

Succesful fund manager

33
Q

Is venture capital liquid or illiquid?

A

Illiquid

34
Q

Is Private Equity liquid or illiquid?

A

illiquid

35
Q

What is Venture capital

A

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

36
Q

What is Private Equity

A

Investing in firms not listed on the market

37
Q

Who is an investment mandate set out by?

A

Investment management company

38
Q

10 Features of an investment mandate

A

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

39
Q

Difference between diversification and hedging?

A

Diversification = Risks are uncorrelated
Hedging = Negative correlations

40
Q

What is short selling?

A

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.

41
Q

Who challenges the investment managers?

A

Dedicated investment management committe

42
Q

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

A

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

43
Q

What is attribution reporting

A

Fund manager, identifing P/L areas in portfolio

44
Q

What is RI?

A

Responsible Investment

45
Q

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

A

Non-Systemic

CISI Cards - Risk in Investment (19 decks)

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