Incorrect Answers R02

Question 1

What are the three ways to measure risk-adjusted returns

Answer 1

Sharpe, Alpha & Information ratio

Question 2

For a UK-Equities Collective fund, in order to calculate the Sharpe ratio, the investor will need to know

Answer 2

Standard Deviation of the fund

Question 3

The portfolio has a beta of 0.85 and an alpha of 1.15. What does this indicate bout the investment manager’s performance?

Answer 3

He has added value through his stock selection.

Question 4

Bill and Wendy wish to fund a single school fees payment of £14,000 in four years’ time. If the
interest rate is 5% per annum, how much will they have to invest now?

Answer 4

£11,517.83

Question 5

An investor has increased the number of UK equities in his portfolio from 10 to 40. This action is most likely to

Answer 5

reduce non-systematic risk

Question 6

Portfolio X consists of blue chip shares and portfolio Y consists of unlisted shares. What type of risk is likely to be significantly higher for portfolio Y when compared to portfolio X?

Answer 6

Liquidity risk

Question 7

In order to reduce the interest-rate risk of a bond portfolio, a fund manager would usually

Answer 7

decrease the modified duration of the portfolio.

Question 7

A UK investor is looking to purchase international equities via an open-ended investment company. In respect of currency risk he should be aware that

Answer 7

a hedged share class will reduce the currency risk

Question 8

A main benefit of using a nominee account is that

Answer 8

The level of administration should be reduced

Question 8

What investment can be referenced against different maturity benchmarks?

Answer 8

Gilts

Question 8

Can the NAV of a £10k investment be more than £10k?

Answer 8

Yes

Question 9

Barry wants to sell a conventional gilt. What should he be aware of regarding the dirty price?

Answer 9

The dirty price assumes that the buyer receives the accumulated interest

Question 10

When are AIM shares exempt from IHT?

Answer 10

After two full years of holding

Question 11

What does a decrease in the purchasing managers index indicate?

Answer 11

Economic growth is likely to be slowing

Question 12

The easing of monetary policy will normally lead to a rise in property values, subject to…

Answer 12

Availability of housing finance

Question 13

How can you profit from globalisation within an investment portfolio?

Answer 13

Economies with strong currencies are the greatest beneficiaries of globalisation and investment
should be made in these countries.

Question 14

According to behavioural finance, an investor would most likely…

Answer 14

Give too much weight to recent investment experience.

Question 14

A key principle of arbitrage pricing theory is the relationship between the price of a security and

Answer 14

Several risk factors

Question 15

When using stochastic modelling in the creation of an investment portfolio. You should be aware that it

Answer 15

Is highly sensitive to small changes in input data

Question 16

When considering the impact of the time value of money on a client’s portfolio, you should be aware that in a deflationary environment…

Answer 16

The real value of money will increase over time

Question 17

What asset class is subject to shortfall risk?

Answer 17

Equities

Question 18

What risk are ETNs exposed to?

Answer 18

Counterparty risk

Question 19

Are VCTs subject to CGT on disposal on shares

Answer 19

No

Question 20

What form of screening is more likely to invest in oil companies?

Answer 20

Positive Screening

Question 21

Ivor invested in a split-capital investment trust that contains zero-dividend preference shares. He
should be aware that they

Answer 21

will have a hurdle rate that may be negative.

Question 22

Regarding fixed interest securities, liquidity risk relates to…

Answer 22

Frequency with which the bonds are traded

Question 23

Do dealing charges form part of OCF

Answer 23

No

Question 24

What is both strategic and tactical asset allocation based on?

Answer 24

Preservation of capital

Question 25

what grade makes bonds sub-investment grade?

Answer 25

BB

Question 26

If the yield curve for fixed-interest securities has recently inverted, this would normally indicate that

Answer 26

Longer dated bonds are yielding less than shorter dated bonds

Medium to long term interest rates are expected to fall or remain low

Question 27

A client has an investment portfolio and is concerned about excessive liquidity risk. To which asset
classes would this most likely apply?

Answer 27

Hedge Funds

Private Equity

Question 28

A retail client wants to invest in private equity on a direct basis for the first time. He should be
aware that

Answer 28

Direct investment into private equity will usually involve a significant capital commitment.

Capital invested via a collective fund may remain in cash for some time.

Question 29

Preference shares:

Answer 29

Have superior ranking in the event of liquidation of the company

Pay a fixed rate of dividend

Only pays dividend if the company has sufficient profits

Question 30

Can there be a penalty upon full encashment of a LISA

Answer 30

Yes

Question 31

In respect of evaluating the performance of a clients investment portfolio:

Answer 31

A UK Equity is likely to be benchmarked against FTSE All share Index

The returns on cash may be an appropriate benchmark

Question 31

Can an OEIC use gearing?

Answer 31

Yes, 10%