Investment Flashcards
1
Q
Factors to consider with tactical asset allocation?
A
- tactical asset allocated is the short term switching of asset in pursuit of high returns
- factors to consider: (chunder need to be timed correctly for PECT muscles)
- timing - needs to happen at the right time
- problems of switching with large portfolio -> could lead to market prices shift
- extra return that can be earned given risk level
- cost of making switch
- tax implications
- restrictions of changing investment within the portfolio
2
Q
Why do we group equities by industry?
A
Practicality: PIER
- Portfolio management better because better deiciosn made
- Information probably from the same source
- Expertise required - can’t be expert everywhere
- Relvanant factors probably relvant accross board
Correlation of investment performance (ASMR) commonly affected factors - structure - change in interest - markets - change in demand - resources - similar input costs
3
Q
What are the main factors that influence property market?
A
Occupations - demand for property from businesses
Development cycle - supply of newly developed property
Investment trends - affected by S&D of property
4
Q
What are the disadvantages of direct property?
A
V - volaility U - unmarketable S - size (too big) E - need expertise D - diversification (lack of)
5
Q
What are factors of prime property?
A
Good quality tenant Good location Age and condition Size Lease size Number of comparable properties
6
Q
closed ended collective investment schemes
A
closed-ended
- once initial tranche of business is investment, scheme is closed to new money
- only way to invest afterward is to buy from willing seller
- marketability of share less than marketability of underlying assets (unless property)
- can take out loans/issue equity
- can buy share for less than NAV depending on S&D
- able to invest in wider range of assets
- an investment trust is a company
7
Q
open ended collective investment schemes pricing unit
A
- unit price calculated daily
- unit price = MV(underlying assets)/ number of units
- complications include:
- how to round values
- how to allow for charges
- whether to use bid/offer price
8
Q
key stakeholders in open ended CIS
A
- managment company (life office)
– set up fund
– registers trust
– does admin
– aims to make profits from charges
trustees (insurance company)
– oversee fund being managed correctly
– monitors unit price
– paid by management company via management charges - investors
9
Q
Factors affecting individual investment strategy
A
- practical constraints (expertise, high expenses if small amount, too expensive for direct investment)
- investment constraints (money, risk appetite, sufficient liquid assets to meet d2d expenses)
- cashflow requirements (when does income < expenses)
- characteristics of their A and L (real and domestic)
- variabliliy of market values (more NB* in ST investment)
- returns from different asset classes
10
Q
How do you value an option?
A
- need to estimate when the option will be exercised
- bad idea to assume when in the money will be exercised and when out of the money it will not be exercised (too much caution)
- when option exercised depends on behaviour of option holder
example: the holder wants immediate access to fund thus will exercise
example: take lump sum instead of not investing in annuity
valuation methods
- find derivative that matches cashflow of option
- deterministic methods (black scholes/closed form) –> take up rate assumed to be high
11
Q
Assumptions used when valuing options
A
- state of the economy
- demographic factors
- consumer sophistication
- cultural bias
- high take up rate if deterministic used
- best estimate if solvency a risk-based estimate
12
Q
Factors to consider with emerging markets
A
- Rapid growth - grow at rates that are not attainable for developed countries
- Volatility - best and worst performing stock is from emerging market
- Political stability - increase volatility of returns
- Language barriers - difficult to get good quality info and local expert may be necessary
- Regulation differences - emerging markets not well regulated which can lead to insider trading/fraud
- Current market valuation - markets are inefficient plus risky investment so price should be cheap
- Diversification - emerging economies are less interdependent and access to markets not available in developed markets
- Marketability - not very marketable
- Restrictions on foreign investment - tight controls on foreign investment and problems in repatriating funds
13
Q
How do you value swaps?
A
- At inception value of swap will be 0 for both parties (ignoring profits and expenses of market maker)
- As market interest change, so does the value of swap to each party
- Even if interest moves exactly as expected it swap will be negative and positive during term
- Relevant discount rates extracted from relevant yield curve
- Can be seen as a combination of bond payments
- Can be seen as combo of forward agreements
14
Q
What are the problems with simplified DDM?
A
value of i is unknown
- one value is inappropriate given shape of yield curve
- instead use gov bond yield + risk premium
g is unknown
- reflects investors dividends growth expectations i.e. future profitability of the company
- use index-linked bond yield to eventually determine g
- look at profit forecasts for the years -> estimate dividend growth in ST -> estimate LT ‘g’
results are sensitive to ‘i-g’
payments ignore tax
taxpayers should use net dividends after tax deductions
model does not work unless i>g
assumes annual dividends payments (could be semi-annually)
15
Q
What is the problem with DDM, NAV and EVA valuing shares?
A
they all assume
- the company is making profits
- the company is declaring dividends
- NAV is suitable
for young companies who aren’t making profits, aren’t declaring dividends and don’t have many tangible assets
- determine and relevant and key measurable factor of business
- look at relationship between this factor and other companies who have quoted values
- factor depends on the business of the company
