Equities

Question 1

How currency affect share price

Answer 1

Strong bad for export good for import

Weak good for export bad for import

Question 2

3 ways political events affect share price

Answer 2

election - uncertainty eg green
Gove policy/spending - tax changes eg corporation tax
Geo politicalv- affect global supply chains eg war in russia

Question 3

managing an equity portfolio in anticipation of a global recession:

Answer 3

Diversify - geography, sector

Defensive stocks - utilities

income stocks - strong dividend history

reduce exposure to luxury - eg travel, luxury goods

Increase fixed interest - ir goes up

increase cash - reduce volatility and increase chance to take advantage

Question 4

relationship between equites/commodities and inflation

Answer 4

price increase/profit increase
demand increase/ price increase/profit increase

Question 5

investor sentiment cycle applies to dividends and profits too

Answer 5

feelings - price - demand

negative and positive

Question 6

how can takeover activity affect share price

Answer 6

acquiring - increase as offer includes premium. more so if hostile due to competition

Aquirer - short term decrease if overpaying
concern about debt

long term - increase if seen as good

Question 7

The quality and track record of management affect share price

Answer 7

change

ability to recognise change and adapt quickly

Question 8

Purpose benefit and risk of primary and secondary market

Answer 8

gov/co raise capital - get in early, riskier

traded between investors otc or exchange - liquidity - volatility

Question 9

what is the purpose of aim

Answer 9

regulated market for younger companies to raise capital can’t have a full listing. less onerous requirements

Question 10

4 differences aim to LSE

Answer 10

smaller cos

nomad

less regulation

less listing requirements

Question 11

Give 5 costs involved in buying selling shares (describe)

Answer 11

• commission;
• stamp duty;
• stamp duty reserve tax (SDRT); and
• the Panel on Takeovers and Mergers (PTM) levy.

Question 12

preference shares yield versus bond/ordinary shares 2 and 2 downside

Answer 12

higher than bond but lower than ordinary due to liquidation order, can be cumulative

no voting rights, fixed

Question 13

Redeemable preference shares def

Answer 13

Fixed dividend for a short period then comany redeems

Question 14

convertable pref shares def

Answer 14

gives the holder the option
to convert the shares
into a predetermined number of ordinary shares
at specific times or under certain conditions.

Question 15

3 advantages of conv pref shares

Answer 15

income with growth pot if convert

Downside protection - just retain if ord share value down

Flexibility to switch when ord shares improve

Question 16

4 decisions to convert pref shares to ord

Answer 16

If the market price of the ordinary shares exceeds the conversion price,

Positive financial performance and growth prospects of the company may encourage conversion

potential dividend yield from the ordinary shares post-conversion is higher than the fixed dividend

Favorable market conditions and bullish sentiment

Question 17

what can impact dividend volatility (5)

Answer 17

Earnings

Economic cycles

industry specific

corporate actions

expenditure needs

Question 18

impact of currency risk on portfolio

Answer 18

When a UK investor holds foreign equities, changes in the exchange rate between (GBP) and the currency of the country where the stocks are based can impact the value of the portfolio.

GBP strengthens against the foreign currency, the value of the foreign investments in GBP terms decreases, reducing returns.

Conversely, if the GBP weakens against the foreign currency, the value of the foreign investments increases, boosting returns.

Question 19

currency risk mitigation (3)

Answer 19

derviatives

use currency hedged funds

diversifiy geography

Question 20

define liquidity risk

Answer 20

Unable to sell their investments or are forced to at a price below their value

Question 21

what is the bid offer spread

Answer 21

The bid-ask spread is the difference between the highest price a buyer is willing to pay for a stock (bid) and the lowest price a seller is willing to accept (ask).

It represents the transaction cost of buying or selling an equity, particularly relevant in markets with lower liquidity.

Question 22

4 factors impacting bid offer spread

Answer 22

Liquidity of the Stock: wider spreads due to lower trading volumes and less competition among buyers and sellers.

Market Volatility: as market makers and traders demand higher compensation for the increased risk of holding positions.

Order Size: less liquid stocks, where executing large trades might require accepting less favorable prices

Market Hours and Trading Activity:

Bid-ask spreads tend to widen during off-market hours or at the open and close of trading sessions when trading activity is lower.

Question 23

private equity feature

Answer 23

finance in return for an equity stake in
potentially high-growth, unquoted companies.

Question 24

3 ways to access private equity

Answer 24

fund, fund of funds, listed co

Question 25

2 advantages private equity

Answer 25

diversification in unlisted unquoted companies

potentially higher and faster returns at early stage

Question 26

6 risks of private equity

Answer 26

high charges

high losses due to young cos failing

one product cos so vulnerable to recession

iliquid

volatile as trading volume low

Hard to value

Question 27

Definition and use of EPS

Answer 27

the amount, in pence, that the company has earned during the year for each
ordinary share.

EPS enables an investor to see the trend in a company’s profitability.

Question 28

dividend yield def and use

Answer 28

measures the dividend as a percentage return on the current share price.

to compare the current return on a share with the return that could be
obtained from bonds or deposits, or from an alternative share

Question 29

3 reasons to be wary of dividend yield

Answer 29

• Some companies distribute a smaller proportion of the profits - Any retained earnings are not lost to shareholders
  because they will finance future profits and dividends.
• The yield will fluctuate with the share price and can look attractive simply because the
  share price has slumped.
• It is not necessarily a reliable predictor of future income, as the level of dividend could
  change

Question 30

dividend cover and defintion

Answer 30

measures how many times the dividend could be paid out of the
available current earnings.

It indicates the riskiness of the investment and the margin of
safety the company has in paying the dividend

Question 31

3 implies of dividend cover

Answer 31

• The higher the figure, the more likely it is that the company will be able to maintain the
  existing dividend if profits fall in the future.
• A relatively high dividend cover implies that the company is retaining the majority of its
  earnings for reinvestment in the business.
• A company may pay a larger dividend than it has available profits for the year. It would
  then draw on its reserves and is said to be paying an uncovered dividend,

Question 32

p/e def and use

Answer 32

relationship between the share price and the
EPS. It is a measure of how highly investors value the earnings of a company.

It can be
viewed as a reflection of the market’s optimism or pessimism about the potential for future
growth in earnings

Question 32

4 notes on p/e

Answer 32

• P/E ratios should only be used to compare companies in the same sector and should be considered in relation to the average of the sector.
• higher than the average for an industry sector, the shares of that company are in demand. The shares will be relatively more expensive, but investors would expect to be compensated by higher than average
  earnings in the future.
• A lower ratio than average would suggest that a company is not greatly favoured by
  investors, probably because it has poor growth prospects.
• a share with a higher P/E ratio is not automatically
  a better buy than a share with a lower ratio. The higher growth expectations may already
  have been taken into account in the share price, or it may just be that it is overpriced.

Question 33

Nav def and use

Answer 33

value of the tangible assets that are
attributable to the ordinary shareholders.

the capital provided by the shareholders plus all of the profits the company has
retained in the business

Question 34

5 notes on nav

Answer 34

• When calculating NAV, it is the nominal value of preference shares that is used £1

*useful guide to the price at which shares should trade for companies whose assets are generally readily realisable, such as property companies or investment
trusts. However, the share price will also be influenced by supply and demand.

• It is less useful for companies that are valued on their earnings potential, where the shares would generally trade above the NAV. This is because investors are willing to pay
  something for the goodwill inherent in the business.
• The NAV is a useful valuation figure in key circumstances:
  – If a takeover bid is made, shareholders can compare the bid price to a realistic NAV to
  check if the assets are being given away too cheaply.
  – If a liquidation seems a possibility, the NAV provides shareholders with an indication of
  the amount they might receive, and helps them to judge whether to hold onto or sell
  the shares.

Question 35

4 limitations of investment ratios

Answer 35

• Different accounting policies can be used to calculate profits and value assets, making comparisons between companies in the same industry difficult.
• The management may decide to change the accounting policy of a company over the
  years, making comparisons over time misleading.
• Many ratios have to be calculated using historical data from accounts. This may not be the best guide to future performance and investment potential.
• When considering trends over several years, periods where there has been high inflation can produce misleading figures. The reported figures may show an upward trend but, in real terms, they could be static or even declining.

Question 36

Price-weighted index

Market-capitalization weighted index

Equal-weighted index

Answer 36

In a price-weighted index, the weight of each stock is based on its share price. Higher-priced stocks have a greater impact on the index value.

Example: The Dow Jones Industrial Average (DJIA) is a well-known price-weighted index.

market-capitalization weighted index, stocks are weighted according to their market capitalization (i.e., the total market value of a company’s outstanding shares). Larger companies have a greater influence on the index.

The S&P 500 is a prominent market-capitalization weighted index.

equal-weighted index assigns the same weight to each stock, regardless of its price or market capitalization. Each company contributes equally to the index’s performance.

Example: The S&P 500 Equal Weight Index is an example of an equal-weighted index.

Question 37

Features of ftse 100 (3)

Answer 37

100 largest
market cap weighted
reviewd quarterly and cos can be added removed

Question 38

3 advantages and 3 disadvantages of narrow main indices

Answer 38

Provides a snapshot of the performance of the largest and most liquid companies in the UK.

Widely recognized and used as a benchmark for UK equity investments.

The market-cap weighting approach ensures that the index reflects the overall market sentiment.

Heavily influenced by a few large companies, which can skew the index performance.

Does not represent the entire UK market, as it excludes smaller companies.

Sector biases may exist, particularly in industries where large companies dominate.

Question 39

passive v active factors (5)

Answer 39

Fees

Outperformance / underperformance

market risk v manager risk

passive more diversified as whole of market

Goals - A passive approach may suit those seeking market returns with minimal cost, while an active approach might appeal to those looking for potential outperformance.

Question 40

4 used of indices in portfolio construction

Answer 40

benchmarks to measure the performance

Indices help in determining the geographic and sector allocation of the portfolio.

Risk Management: Indices provide a reference for managing risk by ensuring diversification across different regions and sectors. .

Passive vs. Active Management: A fund manager may choose to replicate an index (passive management) or seek to outperform it (active management) by selectively investing in stocks that are expected to perform better than the index constituents.

Question 41

3 Benefits and 4 Drawbacks of Using a Single Global Index as a Benchmark:

Answer 41

Benefits:

Diversification: A global index provides broad diversification across multiple regions and sectors, reducing the risk associated with any single country or market.

Simplicity: Using a single index simplifies the investment process and performance evaluation, as it provides a clear, unified benchmark.

Global Exposure: It allows investors to gain exposure to global economic growth and different market dynamics, including both developed and emerging markets.

Drawbacks:

Over-diversification: A single global index might lead to over-diversification, where the impact of individual stock or sector performance is diluted, potentially limiting upside potential.

Sector Biases: Global indices might have inherent sector biases (e.g., technology or financials dominating the index), which may not align with the investor’s desired exposure.

Currency Risk: Investing in a global index exposes the portfolio to currency fluctuations, which could affect returns depending on the investor’s base currency.

Tracking Error: If a fund aims to outperform the index, there may be a tracking error if the fund manager’s stock selection does not align well with the index performance.

Question 42

narrower versus broad indices

Answer 42

Advantages:

Mid-Cap Focus: This makes it a better benchmark for funds targeting growth through mid-sized companies.

Diversification: The FTSE 250 includes a broader range of sectors and companies,

Limitations:

Market Capitalization not be appropriate for funds that invest significantly in large-cap stocks, as those would be better benchmarked against the FTSE 100.

Liquidity Concerns:

Sensitivity: Mid-cap companies may be more sensitive to economic downturns, making the FTSE 250 more volatile