Investment planning

Question 1

What are the two approaches to asset allocation?

Answer 1

Theoretical - linked to MPT, backward looking

Pragmatic - historical data, forward looking

Question 1

What are the two approaches to asset allocation?

Answer 1

Theoretical - linked to MPT, backward looking

Pragmatic - historical data, forward looking

Question 2

What are the differences between strategic and tactical asset allocation?

Answer 2

Strategic is more long term, doesn’t tend to change once set

Tactical is more short term, involves frequent monitoring and varying

Question 3

Why should an adviser be wary of relying too much on stochastic modelling?

Answer 3

Only projections
Only as good as assumptions behind model
Often based on unrealistic steady returns

Question 4

What are the different types of passive investing?

Answer 4

Replicating funds - physically backed, lowest tracking error
Stratified sampling - use optimisation models to decide which shares to buy
Synthetic

Question 5

How would a portfolio be constructed using the top down approach?

Answer 5

Determine asset allocation
Choose sector weightings
Choose the stocks

Question 6

What are the four different management styles when it comes to portfolio construction?

Answer 6

Value
GAARP
Momentum (aka sector rotation)
Contrarianism

Question 7

What is the OCF broadly made up of?

Answer 7

AMC plus ancillary costs

Question 8

What charges are typically excluded from the OCF?

Answer 8

Initial/exit charges
Bid/offer spread
Dealing costs (PTR)
Performance fees
Fund switching charges

Question 9

Dick invests £75,000 in a fund with a 1.5% initial charge. The fund has a performance threshold of 12%, with any excess charged at 15%. If the fund grows at 20%, what will the performance fee be?

Answer 9

Initial charge: £75k - 1.5% = £73,875
Performance fee threshold: 73,875 + 12% = £82,740
Actual growth: 73,875 + 20% = £88,650
Performance fee: (88,650 - 82,740) x 15% = £886.50