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RO2 Investment Principles And Risk > Investment Planning Principles > Flashcards

Investment Planning Principles Flashcards

1
Q

What are the 3 models of asset alocation?

A

The scientific/theoretical approach
The pragmatic approach
Stochastic Model

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2
Q

How does the scientific approach to asset allocation work?

A

Uses mathematical analysis to find the optimum balance of assets to achieve the best return for a client given their attitude to risk.

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3
Q

What is the most popular theoretical position?

A

Optimisation

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4
Q

What is the aim of the scientific/theoretical model?

A

To sit on the correct point of the efficient frontier as per MPT.

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5
Q

How is the theoretical model set up

A

Based on asset allocations that provide the highest risk adjusted return in light of historic underlying returns, underlying risk, and correlation between the underlying investments.

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6
Q

What are the criticisms of the theoretical model?

A

Only works when the world is normal, especially in regards to correlation.

Relies too heavily on past returns

May sit bellow optimisation due to clients’ ethical preferences.

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7
Q

How does the pragmatic approach to asset allocation work?

A

Ignores mathematical constructs of MPT. Combines analysis of the past with the judgment of the advisors’ belief of the future.

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8
Q

What is the aim of the pragmatic approach?

A

To build a portfolio based on rational analysis of the past whilst taking into account the changing world.

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9
Q

What are the criticisms of the pragmatic approach?

A

Places too much reliance on the subjective judgement of the advisor/fund manager.
Poor judgement can lead to poor results.

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10
Q

How does the stochastic profiling method work?

A

Uses complex mathematics, modelled by actuaries to establish the likely returns from a given asset allocation as a spread.

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11
Q

What are the issues with stochastic profiling?

A

Too hard to just sit down and work out at home.
Very sensitive to changes in assumptions
Clients often regard the output of these as fact rather than educated guesswork.

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12
Q

What is the strategic allocation of assets?

A

Sets asset allocation and doesn’t change unless there is a very good reason for changing.

Long-term approach

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13
Q

What is the tactical allocation of assets?

A

Gives the portfolio manager the ability to vary allocation within agreed parameters.

Short-term approach

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14
Q

What is core-satalitie management?

A

Using active funds to attain higher returns

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15
Q

How does top-down portfolio construction work?

A

Start with asset allocation
Look at the geographical split
Look at the sector
Pick the stocks using either fundamental or technical analysis.

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16
Q

What is fundamental analysis?

A

A detailed analysis of the company and related industry

17
Q

What is technical analysis?

A

Share price and trend analysis.
Focused on analysis of charts and uses of mechanical trading

18
Q

How does bottom-up portfolio construction work?

A

Simply picking the stocks the fund manager believes are the best stocks

Some investment houses use this and top-down approaches.

19
Q

What are the different fund manager styles?

A

Value - looking for good stock holding for the long term.
Growth at reasonable price (GARP) - companies with good fundamentals and future prospects for growth.
Contrairaism - finding what the market has missed.
Momentum - looking for trends that are likely to persist.

20
Q

What criteria should be used to select for the sutability of a fund?

A

Objective of the fund
Costs and charges
The fund management group
The fund manager
The type of fund and its risk
Performance
Consideration to passive management

21
Q

What shows the overall level of ongoing charges for a fund?

A

The TER (total expense ratio) does not include dealing costs for exam.

22
Q

What is esg sorted into

A

Environmental - waste, pollution, climate change
Social - diversity, community interaction
Governace - board structure, corruption, Bribery

23
Q

What is negative screening?

A

Ruling out of companies deemed inappropriate by investor.

24
Q

What is positive screening?

A

Focusing on companies that actively aim to do certain things the investor likes

25
Q

What index could be used for socially responsible investment (SRI)?

A

Ftse4good

26
Q

What is important to remember about tracker funds?

A

They often use derivatives rather than owning the actual asset, meaning there will not be dividends.

27
Q

What are the pros and cons on using pensions as a tax wrapper?

A

Tax efficient but not easy to access.
New freedom in access to benefits at 55 makes these more appeal for people with this time horizon.

28
Q

What are the pros and cons for using ISAS as tax wrappers

A

Tax efficient
No or little benefit for non-taxpayer to invest in equity ISA
Limit on investments will be a problem for those seeking to make larger investments.

29
Q

What is the pros and cons of using collective funds as a tax wrapper?

A

Allows CGT allowance to offset gains, but regular changes to portfolio will mean buying and selling representing a disposal for tax.
Income taxed- people likely to be lower tax payers in the future may be better using a wrapper that allows income roll-up.

30
Q

What are the pros and cons of onshore bonds?

A

Gains taxed upto 45%. (20% in the fund 25% out) No tax reclaim for non tax payer.
Switches are not disposals.
Upto 5% of original capital can be withdrawn for 20 years without immediate tax.
Non-income producing so less admin for trustees.
Personal savings allowance can be offset against the gains.

31
Q

What are the pros cons of offshore bonds?

A

Many of the same advantages as onshore.
Able to benefit from gross roll-up
Non taxpayers can largely escape tax

Tax is not deducted within the fund
Charges may be higher than onshore bonds

32
Q

What are the pros and cons of VCT, EIS and SEIS?

A

Highly tax efficient
Tax relief on investment and opportunity to take out money tax free at other end.

Higher risk

33
Q

What is the advantage of using a wrap?

A

All wrappers held on one platform
One consolidated statement would show all the investments and valuations are available online.
Single tax statement makes tax easy to handle.

34
Q

What is open aritecure?

A

A way of charging a wrap with a single admin fee and with commision rebated.

35
Q

What is attitude to risk?

A

How the client feels about risk?

RO2 Investment Principles And Risk (18 decks)

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