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AF4 > Investments > Flashcards

Investments Flashcards

1
Q

Advantages of using ETFs compared to actively managed portfolio’s

A

. Actively managed funds tend to fail to outperform index tracking funds over the Medium to long term.

. ETFs trade throughout market opening hours

. Lower cost than actively managed funds

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2
Q

The effect of warrant holders converting warrants to shares

A

. The share price will reduce because the NAV per share will reduce

. Warrant holders pay less for each share than the price at which they are trading, thus diluting the value of the holding if it is priced below NAV

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3
Q

Sharpe Ratio Calculation

A

. Return on investment - RFR divided by Standard Deviation

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4
Q

Derivatives or instruments used to hedge

A 
. Futures
. Put Options
. CFDs
. Spread Betting
. Short ETFs
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5
Q

The 4 main factors which can influence interest rates

A

. Economic Cycle
. Government or Central bank policy
. Inflation Expectations
. Preference for liquidity

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6
Q

Information Ratio Calculation

A

. Portfolio return - Benchmark return divided by tracking error

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7
Q

Advantages of structural products

A

. Defined Return
. Capital Protection in full or until a barrier is reached
. In some cases, geared returns greater than the index change
. Diversification within a broader portfolio
. ISA eligibility subject to certain conditions
. Tax planning the maturity date with annual CGT

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8
Q

Structured products types - description

A

. Structured Deposits - designed to return capital as a minimum at maturity. They also have FSCS protection.

. Capital protected structured products - Designed to return capital as minimum at maturity. No FSCS protection.

. Capital at risk products - Return is based on benchmarked index performance.

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9
Q

Multifactor Models

A

. The CAPM looks at a single factor whereas a multi factor model explains security returns by looking at a number of factors

. 3 steps of factor analysis:
> Specify a number of factors affecting historic data
> Measure investment Beta against each factor
> Measure the risk premium for each factor

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10
Q

Limitations of the Efficient frontier

A

. The model is only successful if the inputs are accurate

. In a crisis, correlations are highly unstable, and correlations between equities tend to move towards 1

. Standard deviation is assumed to be the appropriate risk measure, other risks are not considered

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11
Q

3 factors used in multi factor modes

A

. Economic factors such as oil price or inflation

. Fundamental factors such as P/E ratio, earnings growth or return on equity

. FAMA or French factors of company size and value

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12
Q

Advantages of the ORB

A

. Accessible to individual investors not just institutions

. Smaller investment amounts allowed, £1000 is typical

. Prices for bonds can be seen on screen

. Steady flow of new issues, including index linked bonds

. Standardised settlement times of T1 or T2

. The minimum price movement is standardised at 1p

. All bonds on ORB or London listed securities and have been admitted to the main market, with a corresponding level of regulatory oversight

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13
Q

Advantages of adding commercial property and real estate to portfolio’s consisting of equities and bonds

A

. Diversification

. Commercial can offer higher returns than average bonds and equity

. Commercial can offer higher levels of income

. Absolute returns have tended to outperform traditional long only funds when markets are weak

. Can adopt some but not all hedge fund strategies

. Onshore funds are regulated and more transparent than some hedge funds

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14
Q

Calculating Standard deviation

A

. 1 (SD) - 68.3% or 2 (SD) 95.5% X SD = X

. Portfolio return - X/ Portfolio Return + X = Range

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15
Q

Disadvantages of High Yield funds

A

. Income is not guaranteed and so it could fall

. Income is unlikely to keep pace with inflation

. In many high yield bond funds, charges are deducted from capital

. The value of the funds can fall as well as rise

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16
Q

What needs to be factored in for Optimisation models using efficient frontier

A

. For all assets an investor can invest in, you should forecast:

> The return from each asset
The risk of each asset
The correlation between each pair

. Establish max return for risk being taken

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17
Q

Factors to consider when investing in structured products

A

. The underlying index

. Tax treatment of the product - CGT or income tax

. The gearing offered by the product

. Capital protection terms

. Type of barrier being used e.g. American or European

. How initial and final stock levels are determined

. Credit rating of the counter party

. The investment lock in period

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18
Q

ETCs

A

PHYSICAL

. Holds the physical commodity it is tracking

. Holding the commodity means storage and insurance costs

. Most ETCs do not hold the physical asset

SYNTHETIC

. Performance based on forward futures of chosen commodity

. No storage or insurance costs

. Carries counter party risks

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19
Q

Calculating the redemption yield

A

. Divide the amount of premium to par, by the number of years left of the gilt

. Divide this figure by the current price of the gilt and x by 100 to get the annual reduction %

. Deduct the annual reduction % from the running yield to get the yield to redemption for premiums, or add for discounts

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20
Q

Advantages + Disadvantages of the holding period return

A

ADVANTAGE

. It looks at the total return, including income that is not reflected in the capital return numbers

DISADVANTAGE

. It is not an annualised number and does not include reinvestment of income

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21
Q

Advantages of investing in onshore absolute return funds compared to fund of hedge funds

A

. Regulated funds (onshore) offer investor protection

. Onshore absolute return funds can pursue a lot but not all of the same strategies as hedge funds, they are though restricted on the level of overall risk.

. They also provide at least fortnightly liquidity

. They are cheaper

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22
Q

What Alpha means

A

. The difference between the expected return from a security given its Beta, and its actual return.

The part of the return which cannot be explained by market movement alone

. It measures both under and out performance

. Positive Alpha indicates positive performance

. Negative Alpha indicates negative performance

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23
Q

Calculating the running Yield

A

Coupon divided by the Gilt price x 100

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24
Q

Disadvantages of utilising a Lifetime Annuity

A

. Low rates compared to nursing home fee’s

. No capital returned on death unless capital protected

. They are inflexible, you can’t change your mind once bought

. The value of a level annuity may be eroded by inflation

. Capital protection and escalation options reduce the initial income

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25
Q

Advantages of using a lifetime annuity

A

. Provides a guaranteed income

. Fixed Income - for life if lifetime option chosen

. Escalating annuities could help meet the cost of rising nursing home fees

. Part of the payment is deemed to be return of capital, and this element is not deemed to be subject to income tax

. can avoid tax liabilities if the income is paid directly to the care home

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26
Q

Typical basis of a structured product

A

. Structured deposits

. Capital protected

. Capital at risk products

. Terms of structured product

. Restrictions on participation

. Barrier at which point the investors capital is at risk

. Kick out or auto call feature allowing investment to mature early.

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27
Q

Advantages of investing in foreign commercial property via an off shore closed ended fund

A

. Would struggle to find a Uk fund that directly invests in european property, as their focus is the UK

. Closed ended means there should be no redemption problems

. The offshore company structure usually allows gearing

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28
Q

Calculating expected return

A

. Number of shares x Share price = Value

. CAPM x Value divided by total of all values

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29
Q

Jensens Alpha

A

. Jensens Alpha is the difference between the return forecast by CAPM and the actual return

. Shows return generated by fund managers decisions

. The higher the Alpha is the better the manager has done

. A portfolio can have a positive alpha but generate a negative return due to the underlying market

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30
Q

Dividend Cover

A

Post tax profit per share divided by Dividend per share

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31
Q

Reasons why a share may show a high Dividend Yield

A

. little expectation of future dividend growth

. Expectations of a dividend cut

. Expectations of losses or even insolvency

. High div to compensate low or negative capital growth

. Maintain dividend paying record to dissuade income seekers

. Based on historical information

. A special dividend may have been paid, with the current price indicating expectations of no further such dividends

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32
Q

New VCT rules

A

. No longer able to invest in companies over 7 years old unless they are a knowledge intensive company, which can be invested into up to 10 years old

. No longer able to invest more than £12m into a company unless they are a knowledge intensive company, which can be invested into up to £20m

. VCT funds cannot be used to help existing management fund a buyout of shares from a founder or other major share holder

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33
Q

Tax treatment of VCTs

A

. Dividends are free of tax

. 30% income tax relief if held for 5 years or more

. Free of CGT

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34
Q

Advantages of high yield funds

A

. Generates higher income yield than equities

. Gives choice of payment frequencies

. Can be liquidated easily at any time

. Interest is paid net, but tax is reclaimable

. the funds are actively managed

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35
Q

Employee revenue productivity

A

. revenue divided by number of employee’s

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36
Q

Working capital ratio

A

.Current assets divided by current liabilities

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37
Q

Return on capital employed

A

. Operating profit divided by equity and long term borrowings

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38
Q

Covered call options

A

. You can sell a covered call and receive a premium for doing so

. If the stock price is at or below the strike price then the holder abandons the option, leaving the seller with the premium

. If the price of the stock rises above the strike price, then the option will be exercised and the value of any growth will be lost

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39
Q

Ongoing charges fund

A

INCLUDED:

. AMC

Other expenses: Registration, Custodian, Auditor or Legal fee’s

EXCLUDED:

. Performance fee

. Platform/advisor charges

. Transactional/Brokerage fee’s

. PTM/Stamp duty

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40
Q

MWR calculation

A

. (income paid out + final value) - (initial value + additions) divided by (initial value + additions) to the power of (x/12 months) x 100

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41
Q

What does the P/E ratio represent

A

. The P/E ratio represents how many times the current years post tax profits or earnings the market is prepared to pay for the company

. Indicated the health of a company

. Can indicate future dividends

. Provides a useful comparison with other companies in the sector

. Indicates further growth prospects - High P/E = High growth potential

. Sometimes a PE and be high because a companies earnings have temporarily fallen

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42
Q

Calculating undiluted discount for NAV

A

. Share price - NAV per share + X

. X divided by NAV per share x 100

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43
Q

P/E ratio

A

. Current share price divided by post tax earnings per share

Alternatively

. Current Market capitalisation divided by Total post tax profits for the year

A low P/E suits a value investor

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44
Q

Why do investments trade at a discount to NAV

A

. Supply and demand

. poor performance

. Management changes

. Illiquidity

. Out of favour sector

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45
Q

Calculating Alpha

A

. Portfolio return - CAPM

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46
Q

Assumptions of CAPM

A

. Investors make rational decisions based on risk

. All investors have the same time horizon

. No single investor can affect market prices

. There are no taxes, transaction costs or restrictions on shorting

. Info is free and available to all investors

. Unlimited sums can be deposited or borrowed at the RFR

. All investments are fully marketable

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47
Q

3 IA non gilt sterling bond sectors

A

. Sterling corporate bond fund:
> Must be 80% denominated in sterling
> BBB- or above
> 80% excludes: Prefs, PIBS or convertibles

. Sterling High Yield:
> Same as above except BBB- or below

. Sterling strategic bond fund:
> Same as above but no rating requirement

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48
Q

2 stage NAV

A

. Net assets divided by shares in issue = NAV per share

. Share price divided by NAV per share

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49
Q

Net redemption Yield

A

. Gross income - tax divided by investment x 100

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50
Q

Corp bonds allowed in S+S ISA’s by HMRC

A

. FCA authorised unit trust

. FCA authorised UK OEIC

. A UCIT retail scheme that should be:
> A unit trust or an OEIC
> Authorised by the FCA for UK retail sale
> Not subject to limited redemption provisions

. A non UK UCITS fund which is a recognised scheme under the FSMA 2000 act

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51
Q

REIT Eligibility

A

. REITS must be resident in the UK for tax purposes

. Must be closed ended

. Listed on a recognised exchange

. Issue only 1 class of ordinary and preference shares

. Distribute 90% of taxable income to investors each year

. 75% of profits and gross assets must come from property rental business

. must be a closed company with 5 or fewer participants

. contain at least 3 properties

. 1 property cannot represent more than 40% of the entire business

. The profit to financing ratio must be less than 1.25

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52
Q

Direct corp bond vs Corp bond funds

A

ADV of Direct:
> Lower cost no manage meant fee’s
> Income is known and fixed
> Certainty of return/capital back at maturity
> Control and transparency of where you are investing
> No CGT

DIS of Direct:
> No diversification, company specific
> No professional fund management
> Reinvestment risk when bond matures
> Less liquidity
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53
Q

Earnings per share

A

. Net Income - Dividends on preferred stock divided by Number of common shares outstanding/or average

. This represent the portion of a companies profit allocated to each outstanding share of a common stock

. Also serves as an indicator of a companies profitability

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54
Q

Market Capitilisation

A

. Number of shares in issue x the share price

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55
Q

Price over earnings

A

. Profit for the year divided by the number of shares = X

. Share price divided by X

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56
Q

Operating return on assets

A

. Bit divided by average total assets

. Shows the % of profit a company earns in relation to its overall resources

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57
Q

Gearing Ratio

A

. Total debt divided by net assets

. Measure the proportion of a companies borrowed funds to its equity

. The ratio indicates the financial risk to which a business is subjected, since excessive debt can lead to financial difficulties

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58
Q

Standard Deviation

A

. A measure of total risk

. Measure the volatility of an investment returns and reflects the volatility of the u underlying markets, plus the risk the manager has taken against the market by making active decisions.

. The standard deviation number indicates probability, assuming normally distributed returns

. There is a 68.3% probability that a return will be within 1 standard deviation

. There is a 95.5% probability that a return will be within 2 standard deviations

. Standard deviation measures past performance

59
Q

Return on Assets

A

. Net income divided by average total assets

. Shows the % of profit a company earns in relation to its overall resources

60
Q

Advantages of listing on A.I.M.

A

. No minimum market capitalisation

. No trading record requirements

. No requirement for a minimum number of shares to be held in public hands

. Fewer admin and reporting requirements/less regulation

. Lower costs than main market

61
Q

Interest Cover

A

. Profit before interest and tax divided by interest payable

. Shows how easily a company can pay their interest expenses on outstanding debt

62
Q

Dividend Yield

A

. Dividend per share divided by share price

. Show how much a company pays out each year relative to its share price

Alt Calc

. Total dividend payout for the year divided by the Current market capitilisation

63
Q

Return on Equity

A

. Net Income divided by average total equity

. The amount of net income returned as a result of share holders equity

. Can be used to measure a companies profitability

64
Q

Net profit margin

A

. Net Income divided by Revenue

. Shows % of revenue left once all expended have been deducted from sales

. Reveals the amount of profit a company can abstract from total sales

65
Q

IPO vs Established company

A

ADV of IPO:
> Attractive share price
> Low cost/no dealing commission
> Limited supply, possibly creating demand later

DIS of IPO:
> No track record, so difficult to analyse
> Companies come to an IPO holding all the cards
> Less onerous reporting requirements for companies
> Allocation can be scaled back if over subscribed
> Short term price volatility after listing

66
Q

Cash ratio

A

. Cash + Marketable investments divided by Current liabilities

67
Q

Current ratio

A

. Current assets divided by Current liabilities

68
Q

Quick Ratio

A

. Current assets - inventory divided by Current Liabilities

69
Q

Operating profit margin

A

. EBIT divided by revenue

Alt

. Operating profit divided by revenue

. This is used to measure a companies pricing strategy and operating efficiency

. This measures what proportion of a companies revenue is left over after paying for variable costs of production such as wages and raw materials

70
Q

return on common equity

A

. Net income - pref divs divided by average total common equity

. measures how much money a company generates from the monies shareholders invested

71
Q

Working capital turnover

A

. Sales divided by average working capital

. Indicates whether a company has enough short term assets to cover its short term debts

. Below 1 indicates negative working capital

. Over 2 means the company is not investing excess assets

72
Q

BETA

A

. Measures a component of total risk

. Measures the systematic or market risk of the stock

. Average Beta of stocks in the market is 1

. If a stock has a BETA higher than 1 then it will be particularly sensitive to market movements and will most likely exaggerate them

. A stock with a BETA less than 1 tends to dampen market movements

73
Q

The Information ratio

A

. Compares the relative returns achieved by a fund over its benchmark with the funds tracking error

. A positive Information ratio indicates outperformance

. A negative information ratio indicates under performance

. Tracking error is the standard deviation of relative returns, a tracking error of 5% would indicate that 68.3% of returns will lie within 5% of the average relative return

74
Q

Disadvantages of investing foreign commercial property via an offshore closed ended fund

A

. Can be limited liquidity within wide spreads

. there is only a limited choice of funds

. The closed ended nature means that there is protection from forced property sales

. Gearing increases risk

. Charges can be high

. NAV - premium or discount, can both widen

. Currency risk

75
Q

Risks associated with structured products

A

. They are exposed to market risk

. Counterparts risk

. Some have to be held until full maturity

. Fixed redemption dates make timing the market difficult

. The tax treatment of structured deposits is not particularly efficient for higher rate tax payers as profits are taxed as income

76
Q

What does TWR measure

A

. Funds should be measured whenever there is a significant cash flow in or out

. Funds returns are then compounded to give overall TWR

. The TWR measure is the return of the investor who invested at the beginning of the time period

. TWR eliminates distortion of the timing of the cash flows

. This allows us to compare performance of managers or funds on a more equal footing

77
Q

Advantages of investing in a FTSE 100 tracker rather than a SCARP

A 
. No limit to upside if FTSE performs well
. Greater transparency
. Greater liquidity
. Dividend reinvestment
. Ability to plan tax
. Ability to partial sell
. No automatic kick out
. Covered FSCS
78
Q

Why is deflation damaging for the economy

A

. It increases the real value of debt
. People will save rather than spend
. Prices will fall further/deflationary spiral
. Lower demand/ lower production/ increased unemployment
. Reduced profits
. Decreased investment
. Banks less likely to lend against falling asset prices

79
Q

The features of a SCARP

A

. Early return of capital
. Early withdrawal penalties
. Tax issues at maturity
. Level of investor involvement

80
Q

Risks of a SCARP

A 
. Counterparty
. Capital
. Reinvestment
. Liquidity
. Opportunity
. Inflation
81
Q

How to counteract deflation

A

. Reduce interest rates - stimulates demand
. Quantitative easing - Reduce borrowing costs
. Increase gov spending
. Reduce taxes - encourage lending

82
Q

Limitations of the sharpe ratio

A 
. Returns are not normally distributed
. Assumes SD is the correct measure
. Can be manipulated by changing the measurement interval
. Simplistic/ ignores other factors
. Ignores charges
. Uses historical data
83
Q

Reasons why MWR may differ to ARR

A

. MWR is influenced by the timing of cash flows
. Not a straight line return
. May have been good performance in periods where less money was invested/ lower performance when more money invested

84
Q

Methods that a fund tracking the FTSE 100 may utilise

A

. Full replication
. Sampling/ simplified stratification
. Optimisation/ Algorithm
. Synthetic/Derivatives

85
Q

Annual rate of return

A

The performance in this example: 33%/3 years

((1.33/100) to power of 1/3 - 1) x 100 = 9.97%

86
Q

Difference between UT’s and IT’s

A 
. Open ended/ Closed ended
. PLC versus trust/ shares versus units
. Directors/ Trustee's
. Appoint investment manager/ in house manager
. Listed on a stock exchange/ not listed
. Single priced/ dual priced
87
Q

Risks of investing in UK corp bonds

A

. Interest rate risk - Rising % rates reduce value of bonds
. Credit/default risk - Default on coupons or maturity
. Inflation risk - Returns eroded by inflation
. Reinvestment risk - maturing when % rates are low
. Political/legislation/tax risk - changes to any

88
Q

Why would a bond price be significantly below a par price

A

. Company might be in trouble/ profits decrease
. May default on coupon
. May not pay the redemption value
. In a sector that is struggling/ out of favour

89
Q

Why choose bonds that mature in different years

A 
. Reduces reinvestment risk
. Reduces interest rate/ reinvestment risk
. Reduces risk of default
. To meet future liabilities
. Provides regular cash flows
. Diversification
90
Q

Impact of increase in interest rates

A

. Bond prices fall
. By the same % of fall for each year of duration
. Yields go up
. the shorter the duration the less the price will fall
. the longer the duration the more the price will fall

91
Q

Advantages and disadvantages of centralised investment proposition

A

Advantages
. Eliminates profit drift
. Removes advisor/ behavioural bias
. Matches/ Keeps in line with attitude to risk

Disadvantage
. One size fits all/ not bespoke
. Additional tax due to higher portfolio turnover
. Assumptions/past data underpinning model portfolio’s may be wrong

92
Q

What is meant by a centralised investment proposition

A

. Standard investment approach/ company specific
. Segmenting clients into risk categories/ objectives
. Model portfolio/ Asset Allocation
. Based on investment theory/ Stochastic modelling
. Rebalanced/ Periodically reviewed

93
Q

Methods other than rights issues used to raise capital

A

. Placing/ Placement
. Private offer to large institutions/ sophisticated investors
. Open offer to existing share holders
. Similar to a rights issue/ existing share holders
. Offered new shares on a pro rata basis at a discount
. Shareholder not compensated if rights lapse

94
Q

Why might a company have a rights issue

A

. To finance a specific acquisition/expansion/investment
. To reduce debt
. To strengthen the balance sheet

95
Q

Purpose of using a benchmark in the investment process

A

. It sets asset allocation/ starting point
. It is independent/ a neutral agreed basis
. To manage risk expectations
. Provides measure of relevance
. Value added or performance by the manager

96
Q

Causes of ETF tracking error

A 
. Management fee
. Inaccuracy of tracking method used (sampling)
. Other expenses/costs
. Currency hedging
. Cash drag/uninvested cash
. Dividend reinvestment lag
. Tax/witholding tax
. Securities lending
97
Q

What is meant by quality of earnings

A

. Accurately represents trading performance of business
. Not manipulated by accounting policies/ no one off items
. Strong free cash flow/ cash generation
. Performance repeatable/ sustainable/ dependable/ consistent

98
Q

Measures in relation to employee’s that you would look at to assess quality of management

A

. Staff turnover
. Absenteeism
. Profit per employee

99
Q

Property vs fixed interest bonds in rising inflation

A

. Market value of bonds fall as inflation rises
. Maturity value eroded by inflation at redemption
. Real value of income eroded by inflation
. Both are fixed
. Diversification
. Property is a real asset/ capital increases with inflation
. Rental income revalued upwards with inflation

100
Q

7 factors which determine the return on a commercial property fund

A 
. Location
. Type of holdings (office, retail, industrial)
. Size of property/ Liquidity
. Rental Yield
. Tenant Quality
. Length of lease
. Void occupancy rates
101
Q

Risks on disposal of OEICS investing in property

A

. Managers may not have sufficient cash to pay sellers
. Forced to sell property cheaply
. Smoothing out to protect remaining share holders
. Move to weekly valuations
. Apply dilution levy
. Apply fund dealing suspension

102
Q

Risks on disposal of REITs

A

. Subject to supply/demand - as they are close ended
. A weak market could cause them to be heavily discounted/or discounted compared to NAV
. In extreme conditions REITs can become illiquid

103
Q

Using lifetime ISA towards first home

A

. No withdrawal charge if:

. The house is worth less than £450k
. You are buying the home with a mortgage
. You use a conveyancer or a solicitor to act for you in the purchase, and the funds are paid directly to them by your lifetime ISA provider
. The ISA has to be open for atlas 12 months before withdrawal

104
Q

Withdrawals and transfers from lifetime ISA’s

A

. If you withdraw before 60 there is a 25% withdrawal charge - this also applies if you transfer the ISA before 60

. No charge if:

. Using towards first home
. Aged 60+
. Terminally ill, less than 12 months
. Transfer to another different lifetime ISA provider

105
Q

Lifetime ISA’s

A

. Government bonus of 25% of money put in
. £1000 max investment per year that gets 25% bonus
. Usual tax ISA rules apply
. Age range is 18-40 to open ISA
. Must be UK resident
. You can invest £4000 per year (but only £1000 gets bonus)
. Hold stocks, cash, shares, qualifying investments
. You can pay into until you reach 50
. You can keep the ISA open beyond the age of 50, but you cannot make any further additions to it

106
Q

How is technical analysis used to make investment decisions

A

. It is based only on the share price and excludes fundamental analysis
. Uses charts of past share price
. Identifies patterns/trends to indicate future performance
. Assumes these are repeated

107
Q

Differences in listing requirements between A.I.M. and main market

A

. No minimum capitalisation
. No minimum amount of shares held in public hands
. No trading history required
. Broader range of accounting standards can be applied
. AIM has a more relaxed reporting time frame
. AIM is higher risk

108
Q

Advantages of a stock broker managed portfolio

A

. More diversification
. Wider availability of possible investments
. Managers expertise
. Less management administration

109
Q

Advantages of own shares selection

A

. Control/involvement in investment decisions
. Concentrated portfolio can mean better performance
. Not subject to a managers short term performance pressures
. Lower charges

110
Q

5 limitations of only using ratio analysis

A

. Changes in accounting policies over time
. Based on historic figures
. Financial statements contain subjective elements
. Need to compare to sector/peers/trends over time
. Cannot consider in isolation/need to look at other factors

111
Q

Why could a company’s P/E be different from the average

A

. Quality and consistency of earnings
. Expectations of future profits/earnings
. Exceptional items in the accounts
. Shares are overpriced

112
Q

Forward P/E and trailing P/E

A

Forward:
. Uses future earnings/profit guidance
Drawback:
. It uses estimates, so is therefore subjective

Trailing:
Uses the last 12 months earnings/profit
Drawback:
Past performance cannot indicate future performance

113
Q

Price over earnings

A

. Total profit divided by shares outstanding = profit per share
. The share price divided by profit per share

114
Q

What is meant by value investing

A

. Identifying undervalued stocks
. Trading for less than their actual intrinsic/fundamental value
. The market is inefficient/overreacts to good or bad news
. Takes a longer term view

115
Q

Risks of peer to peer lending

A 
. No FSCS
. Lack of liquidity
. Default/Credit risk
. Counterparts/platform solvency risk
. New industry so no experience of how it may withstand and economic downturn
116
Q

The factors that determine the price of an option

A 
. Market value of the underlying asset
. Strike price - in or out of the money
. Export date/time to expiry
. Expected volatility
. Type of option - American or european
117
Q

How may the bank of England issue gilts into the market

A 
. Auction
. Tender
. Conversion
. Tap
. Syndication
. Repo
118
Q

Tax on Gilts

A

. The coupons are taxed as income
. A basic rate tax payer has a £1000 tax free interest/personal savings allowance
. CGT free

119
Q

Flat gilt yield curve

A

What does it mean:
. Longer dated bonds have the same interest rates as shorter dated bonds - the interest is not therefore expected to rise

Whats the result of this:
. It is expected that inflation will not increase
. Will cause slow economic growth/low economic growth

120
Q

Risks associated with treasury gilts

A

. Interest rate risks - rising % rates reduce bond value
. Reinvestment risk - Finding another gilt that is similar
. Capital risk - Loss on sale or maturity
. Legislative/tax risk - changes in taxes or legislation
. Deflation risk - Income payments could fall

121
Q

Why might a gilt have a negative yield to redemption

A

. High demand
. Expectation of rising future inflation
. Gilt trading above par after allowing for indexation since issue
. Low coupon does not offset real loss

122
Q

How index linked bond coupons are determined

A 
. Take RPI value
. X months prior to coupon date
. Divide by RPI set at issue date
. Apply to the coupon
. Divide by 2 as semi annual
123
Q

Disadvantages of Food bond vs A bond on ORB

A 
. Not tradeable, no liquidity
. Physical issues - food quality can deteriorate
. No market price or track record
. No disclosure or prospectus/no due diligence
. No ongoing regulation
. Cannot be placed in an ISA
. Small investment only
. No potential for capital gain
. Higher risk due to size of issuer
124
Q

Behavioural biases that investors typically show

A

. Loss aversion - afraid to realise losses
. Endowment affect - Unwilling to change investments you own
. Present bias - Too much emphasis on short term outcomes
. Herding - Follow the crowd
. Over confidence - Over estimate own ability/knowledge
. Anchoring - Fixed on numbers they know have no relevance
. Regret theory

125
Q

Risks of deposit based structures

A

. May receive no interest/return
. Inflation risk
. May be a penalty for accessing
. Counterparty risk

126
Q

Risks associated with government bonds

A

. Economic - sever financial difficulty can impact on a bond
. Government/political - Political instability/raised taxes/confiscation of assets
. Credit/default - Non payment of capital or interest
. Currency - If foreign then the exchange rate can change
. Interest rate risk - Increase in interest rates can reduce price of the bond
. Liquidity - The bond may become more difficult to buy/sell

127
Q

Criteria for selecting benchmark

A

. Should be specified in advance
. Agreed with client
. Priced at suitable periods
. There should be availability of historic data
. It should be transparent and unambiguous
. Relevant/appropriate to the investment objectives

128
Q

Why are benchmarks used

A

. To provide independence and neutrality from which to assess
. Assess performance of investment manager
. Assess underlying contribution of asset allocation
. Assess stock selection
. To help agree and manage client expectations with regard to the portfolio’s relative performance

129
Q

How can a platform assist in rebalancing

A 
. Can be automatic
. Can be manual
. Can be done at low or no cost
. Little admin/input
. Consolidated view
. Tools could help with tax planning
130
Q

How could adding a commodity index to an equity p/f help reduce the overall risk of the p/f

A

. Negative correlation to other assets

. Diversification

131
Q

3 types of borrowing other than from a bank that a REIT could utilise

A

. Loan stock/Convertibles/Corporate bonds
. Debentures
. Zero dividend preference shares

132
Q

Reasons why 1 dividend yield may be higher than the other

A 
. Recent fall in share price
. Expectation of dividend cut
. Expected future losses/insolvency
. Currency changes
. The underlying property yields more
133
Q

Limitations in relying on price to earnings ratio

A

. The share price is set by the issuer and not dictated by the market
. The share price may change significantly after listing
. Based on historic earnings data
. Only one factor/leaves out other information
. Level needs to be considered relative to competitors
. Needs to be compared to past levels and trends

134
Q

How is purchasing power protected by index linked bonds

A

. Coupon increases with RPI
. Capital increases with RPI
. RPI is a measure of inflation
. Obtained if bond held to maturity

135
Q

EPS calculation

A

. Div cover x Dividend

. Dividend cover:

EPS divided by Dividend per share

136
Q

Advantages of investing in a REIT rather than a BTL

A 
. Part sell
. Smaller/regular investments
. Ease of admin
. Lower costs
. Diversification
. Greater liquidity
. Professional management
137
Q

Premium to NAV

A

. Net value divided by number of shares = X

. Share price divided by X - 1 = answer

138
Q

3 types of borrowing for a REIT other than from the bank

A

. Loan Stock
. Zero Div pref shares
. Debentures

139
Q

Drawbacks of a REIT borrowing from a bank

A

. Covenant Requirements
. Shorter term
. Variable % rates, likely to increase

140
Q

Critiscism of CAPM

A 
. Assumes you can borrow unlimited funds
. Assumes no taxes/charges
. Assumes investors are rational and risk adverse
. Assumes market is efficient
. Single factor model/only uses beta
. Based on historical data
141
Q

Explain why Momentum, Size and Value factors are included in models

A

. Momentum - funds that have performed well over the previous 6-12 months tend to continue to outperform

. Value - Undervalued shares will outperform

. Size - Smaller cap companies will outperform larger cap

142
Q

Adv of staying in current VCT rather than selling and investing in new VCT

A

. Any discount to NAV will have more time to close
. Shorter time period money is tied up for
. May be less risky
. Avoids costs of selling existing and buying costs of new shares

143
Q

Dis of retaining existing VCT rather than buying a new one

A

. Could have liquidity issues
. May not achieve price expected
. Bid offer spread could widen/ share price could fall further

AF4 (1 decks)

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