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Investment, Risk & Taxation > IAD Questions - General > Flashcards

IAD Questions - General Flashcards

1
Q

What does the Sharpe ratio measure?

A

Measures the return above the risk-free rate from an undiversified equity portfolio, for each unit of risk assumed

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2
Q

How is risk measured in the Sharpe Ratio?

A

Via Standard Deviation of the portfolio

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3
Q

How is risk measured in the Treynor ratio?

A

Via Beta (Market risk)

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4
Q

What does the Treynor ratio measure?

A

Measures the return above the risk-free rate from an diversified equity portfolio, for each unit of risk assumed

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5
Q

What does the Jensen Alpha measure?

A

Evaluates performance of a well-diversified portfolio against a CAPM benchmark (with the same level of BETA as the portfolio)

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6
Q

What does the Information ratio measure?

A

Assesses the degree that fund manager uses skill to enhance returns.

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7
Q

What is Systematic risk?

A

Risk that affects the financial system as a whole (aka Market risk). Undiversifiable. Eg. Interest, currency rate changes

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8
Q

What is Systemic risk

A

Risk of collapse of entire financial system as a whole.

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9
Q

What is bootstrap funding?

A

Entrepreneurs minimise outside debt and equity by borrowing privately eg. Private credit card debt. Involves risk for founders but without any stakeholders there’s more freedom

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10
Q

Describe legal structure, pricing and components of a Unit Trust

A

Legal: A trust

Pricing: Dual Pricing, NAV calculated daily

Components: Trustee, UTM, Open-ended, Units

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11
Q

Describe legal structure, pricing and components of an OEIC/ ICVC

A

Legal: A company

Pricing: Single pricing (levies), NAV calculated daily

Components: Depository, ACD, Open-ended, Shares

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12
Q

Describe legal structure, pricing and components of an Investment Trust Company

A

Legal: A company

Pricing: Dual Pricing, secondary market trading

Components: Company structure, Closed-ended, shares

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13
Q

What’s the difference between Physical and Synthetic ETFs

A

Physical - Own the underlying assets.

Synthetic - do not own the underlying assets. Gain exposure using derivatives.

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14
Q

What is the intrinsic value of an Option?

A

Amount in the money

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15
Q

What is the Time Value of an Option?

A

The Premium - Intrinsic Value

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16
Q

How much tax applies to each band of VCT Capital Gains?

A

0%

17
Q

What type of bonds have more volatile prices, short or long-dated bonds?
And how do coupons play a role?

A

Longer-dated bonds are more sensitive to interest rate changes than shorter-dated bonds.

High coupons smooth volatility whilst low or zeros increase volatility.

18
Q

What effect does interest rates rising have on bond prices?

A

Bond prices fall

19
Q

Name 2 cornerstones of Modern Portfolio Theory

A

It assumes rational investors demand higher return to invest in a riskier asset

Diversifying a portfolio with investments that do not behave in the same way reduces overall risk (unsystematic risk)

20
Q

What is a potentially exempt transfer (PET) ?

A

A lifetime transfer from one individual to another that is exempt from IHT providing the transferor survives 7yrs

21
Q

What is a chargeable lifetime transfer (CLT)?

A

A lifetime transfer to a discretionary trust. This is charged at a reduced 20% IHT

22
Q

What is Deterministic modelling?

A

Involves taking a single input (eg. average growth rate) and assuming this will remain constant over a period with no randomness.

23
Q

What is Stochastic modelling?

A

Involves using many random variables based on historical data to model thousands of possible investment returns.

24
Q

What is active share?

A

It looks to compare the stock weights of the manager to that of the benchmark

25
Q

What is immunisation?

A

Passive bond strategy
An investor buys a portfolio of bonds with a duration (not maturity) equal to any liabilities

26
Q

What is Cash Flow Matching?

A

Passive bond strategy
Purchasing bonds whose redemption proceeds will meet a liability as they fall due

27
Q

How is risk measured in the Jensen measure?

A

Beta

28
Q

What rate of CGT do Unit Trusts, OEICs and ETFs pay within the fund on Capital Gains?

A

0%

Investment, Risk & Taxation (4 decks)

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