IAD Questions - General Flashcards
What does the Sharpe ratio measure?
Measures the return above the risk-free rate from an undiversified equity portfolio, for each unit of risk assumed
How is risk measured in the Sharpe Ratio?
Via Standard Deviation of the portfolio
How is risk measured in the Treynor ratio?
Via Beta (Market risk)
What does the Treynor ratio measure?
Measures the return above the risk-free rate from an diversified equity portfolio, for each unit of risk assumed
What does the Jensen Alpha measure?
Evaluates performance of a well-diversified portfolio against a CAPM benchmark (with the same level of BETA as the portfolio)
What does the Information ratio measure?
Assesses the degree that fund manager uses skill to enhance returns.
What is Systematic risk?
Risk that affects the financial system as a whole (aka Market risk). Undiversifiable. Eg. Interest, currency rate changes
What is Systemic risk
Risk of collapse of entire financial system as a whole.
What is bootstrap funding?
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
Describe legal structure, pricing and components of a Unit Trust
Legal: A trust
Pricing: Dual Pricing, NAV calculated daily
Components: Trustee, UTM, Open-ended, Units
Describe legal structure, pricing and components of an OEIC/ ICVC
Legal: A company
Pricing: Single pricing (levies), NAV calculated daily
Components: Depository, ACD, Open-ended, Shares
Describe legal structure, pricing and components of an Investment Trust Company
Legal: A company
Pricing: Dual Pricing, secondary market trading
Components: Company structure, Closed-ended, shares
What’s the difference between Physical and Synthetic ETFs
Physical - Own the underlying assets.
Synthetic - do not own the underlying assets. Gain exposure using derivatives.
What is the intrinsic value of an Option?
Amount in the money
What is the Time Value of an Option?
The Premium - Intrinsic Value
How much tax applies to each band of VCT Capital Gains?
0%
What type of bonds have more volatile prices, short or long-dated bonds?
And how do coupons play a role?
Longer-dated bonds are more sensitive to interest rate changes than shorter-dated bonds.
High coupons smooth volatility whilst low or zeros increase volatility.
What effect does interest rates rising have on bond prices?
Bond prices fall
Name 2 cornerstones of Modern Portfolio Theory
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)
What is a potentially exempt transfer (PET) ?
A lifetime transfer from one individual to another that is exempt from IHT providing the transferor survives 7yrs
What is a chargeable lifetime transfer (CLT)?
A lifetime transfer to a discretionary trust. This is charged at a reduced 20% IHT
What is Deterministic modelling?
Involves taking a single input (eg. average growth rate) and assuming this will remain constant over a period with no randomness.
What is Stochastic modelling?
Involves using many random variables based on historical data to model thousands of possible investment returns.
What is active share?
It looks to compare the stock weights of the manager to that of the benchmark
What is immunisation?
Passive bond strategy
An investor buys a portfolio of bonds with a duration (not maturity) equal to any liabilities
What is Cash Flow Matching?
Passive bond strategy
Purchasing bonds whose redemption proceeds will meet a liability as they fall due
How is risk measured in the Jensen measure?
Beta
What rate of CGT do Unit Trusts, OEICs and ETFs pay within the fund on Capital Gains?
0%
