J10 Flashcards
(436 cards)
1
Q
Gaining trust requires what three skills
A
1) earning trust
2) giving advice effectively
3) building relationships
2
Q
what is critical yield?
A
Rate of return needed to meet the objective, based on a given level of investment
3
Q
what is stochastic modelling?
A
Asset allocation based on an economic model. The aim of these models is to predict probable outcomes for different investments depending on a range of assumptions
4
Q
what may clients be categorised as?
A
1) retail client
2) professional client
3) eligible counterparty
5
Q
Where a firm proposes to manage investments for a retail client, what info must it provide?
A
1) method and frequency of valuation of the investments
2) details of any delegation of discretionary management
3) specification of any benchmark against which the portfolio will be compared
4) types of investments that might be included and types of transaction that may be carried out
5) clients investment objectives
6
Q
what must benchmarks be?
A
Meaningful and provide appropriate indication to the client of what performance could have been achieved based on their objectives and types of investment in their portfolio
7
Q
What is a black swan event?
A
It is a rare event with severe consequences, used to describe any event that is unexpected, difficult to predict and has severe negative effects
8
Q
three elements of risk assessment
A
1) risk tolerance
2) risk perception
3) risk capacity
9
Q
what is risk tolerance?
A
degree of uncertainty that an investor can handle in regard to a negative change in the value of their portfolio
10
Q
what is risk perception?
A
subjective view that clients have on the characteristics and severity of risk
11
Q
Four objectives of investing
A
1) capital preservation
2) capital appreciation
3) current income
4) total return
12
Q
what are some investment constraints?
A
1) time horizon
2) liquidity
3) tax
4) any legal and regulatory factors
5) any unique needs and preferences
13
Q
3 types of esg
A
1) positive
2) negative
3) responsible ownership
14
Q
what is a net assets statement?
A
It is a statement of what the client owns and owes at any particular time
15
Q
what are lifetime cash flow projections?
A
provide year by year summaries of cash paid to (and out by) the client, showing those years in which there is a surplus or deficit
16
Q
AER formula
A
(1+r/n)n - 1
17
Q
What is a tier one capital ratio?
A
This is the ratio that regulatory authorities use to judge the adequacy of a banks capital position
18
Q
what is a credit default swap?
A
cost of insuring a bank against default using a CDS, which is a derivative that enables an organisation to protect itself against the risk of default by passing that exposure on to someone else
19
Q
How much capital must banks maintain under basel rules?
A
At least 8%
20
Q
Timeframe for FSCS Payout?
A
Within 7 days for most, more complex within 20 working days
21
Q
Protection status for deposits with uk authorised banks held in an EEA Branch?
A
No longer protected by the FSCS, but may be protected by the depositor protection regime in each EEA country but will depend on that countries rules
22
Q
what are treasury bills?
A
Issued by governments to finance their short-term cash needs
In the UK, this is managed by the DMO
issued at weekly auctions, with maturities of one, three or six months
23
Q
what are certificates of deposit?
A
Receipts from banks for deposits placed with them
Deposits have fixed rate interest, usually related to a reference such as SONIA
most CDs issued with maturities of one to three months and interest is paid on maturity
24
Q
what is commercial paper?
A
short term money market funding instrument issued by companies to fund day to day cash flows
Issued at discount to maturity, with typical maturities between 30 and 90 days
Higher risks involved so higher returns
25
What are short term money market funds?
invested in short term debt, and money market instruments and have a weighted average maturity of no more than 60 days and a weighted average life of no more than 120 days
Stable NAV
26
what are normal money market funds?
aims to make slightly higher returns than short term, invest with extended periods of 6-12 months
fluctuating NAV
27
what does mid market bond price mean?
mid point between the bid and offer price quoted in the markets, investor would pay higher price to purchase (offer price) and receive lower price on sale (bid price)
28
how are gilts classified?
shorts = up to 7 years before redemption
mediums = 7 to 15 years
longs = over 15 years
29
what are medium term notes?
standard corporate bonds that are usually issued as part of a programme of bond issues. They are usually defined as having maturities ranging from 9 months to 5 years
30
what are eurobonds?
large international bonds, denominated in a currency different from financial centre in which they are issued
31
Foreign bond names?
Yankee - USA
Samurai - Japan
Bulldog - UK
Matador - Spain
32
Conversion premium / discount for convertible bonds
market price of convertible stock / (conversion ratio x market price of ordinary shares) - 1 x 100
33
Interest yield formula
Coupon / clean price x 100
34
redemption yield
1) calculate interest yield
2) work out difference between what they paid and PAR, divide this by the number of years to redemption, then divide this figure by market price
3) + or minus this off flat yield
35
what causes inverted or reverse yield curves
investor expectations that interest rates will fall in the short term
36
What is non investment grade for moody’s, S&P and fitch?
Moody’s = BA
S&P and Fitch = BB
37
what is modified duration?
used to calculate how sensitive a bond is to changes in interest rates
38
Formula for modified duration
duration / (1+GRY)
39
what are offers for subscription?
special form of tender offer for sale, issuer seeks bids above minimum subscription level, but does not commit to go through with it unless minimum subscription is met
40
what are placing?
fastest and cheapest method of issuing new shares, often used as a supplementary method to an offer for sale
issuing company decides on price and company calls directly on big institutions and makes a sales presentation
41
what are open offers?
similar to a rights issue, but rights cannot be traded
42
what are bonus issues?
involves company issuing further shares, to its existing shareholders without raising any new funds
a bonus issue is used to make companies share capital more in line with its worth, and reduce share price to make it more marketable
company issues new shares and pays for them out of capital reserves, so shares are fully paid to shareholders,
43
what are share splits?
It is the process whereby a company splits the par value, for example changing £1 ordinary shares to 50p ordinary shares
44
Rental yield formula
annual rental income / price of property x 100
45
What is a derivative?
Very simply a financial instrument that is based on some other asset, known as an underlying asset
46
what is a future?
exchange traded contract to buy or sell an asset at a specified date for a certain price
47
what is an option?
gives holder the right but not the obligation to buy or sell asset at specified price
48
what is a swap?
agreement between two parties to exchange a series of cash flows over a period of time - most common is interest rate swap
49
what is the FTSE 100 index future?
based upon Ftse 100 index,
50
what is the FTSE 100 index future?
based upon Ftse 100 index,
51
what are STIR futures?
based on short term interest rates such as three month SONIA
52
what is a call option?
the right to buy at the exercise price if they choose
53
what is a put option?
the right to sell at the exercise price if they choose
54
when do call and put options have intrinsic value
call = if strike price is lower than current price
put = if strike price is higher than current price
55
what is a warrant?
A type of long term call option, holder has the right but not the obligation to buy shares at a fixed price at a predetermined rate
produce no income and represent geared investment with potentially high level of risk and reward
56
what is a covered warrant?
Type of option. issued by financial institutions such as banks,
the writer of the covered option, will often cover or hedge its exposure by either buying underlying stock or taking out futures or options on an exchange
They differ from traditional options because they are always cash settled - never any delivery of underlying asset and the maximum loss that an investor can make is the amount invested
57
Four broad categories of hedge fund strategy:
1) Long/short funds
2) Relative value funds
3) event-driven funds
4) tactical trading funds
58
what are long/short funds in hedge funds?
invest in equity and or bond instruments, combine long investments with short sales of individual securities and derivatives to reduce market exposure
This strategy is most popular
59
What are relative value funds?
often said to adopt market neutral strategies, managers rely on arbitrage to produce returns
involves identifying and exploiting pricing anomalies
60
what are event driven funds?
use the price movements arising from anticipated corporate events to achieve their returns
61
What is tactical trading hedge fund strategy?
relatively small part of the hedge fund universe. trade in currencies, bonds, equities and or commodities with largest funds having sets of dedicated teams in each area
62
Advantages of hedge funds
1) Diversification
2) Volatility
3) Expertise
63
Disadvantages of hedge funds
1) lack of regulation and protection
2) high minimum investments
3) complexity
4) volatility
64
what are structured products?
investment plans where the return is delivered at a defined point and is dependent on the performance of an index or asset and the terms of participation in the terms
The three types are:
1) structured deposits
2) capital protected products
3) capital at risk products
65
what are structured deposits?
designed to return investors original capital as a minimum at maturity
66
what are capital protected products?
Designed to return at least the original capital, regardless of how badly the stock market or underlying measure performs
unlike structured deposits they don’t benefit from FSCS protection if third party defaults
Rarely been on offer
67
What are capital at risk products?
have the potential to produce much higher returns, but will give rise to a loss at maturity if underlying investment performs poorly
typically include a barrier that protects capital until stock market falls by a certain amount e.g 35%
68
3 elements of the simplest capital protected products?
1) a zero coupon to provide repayment of capital at maturity
2) derivatives - options used to provide returns linked to the referenced class
3) charges - covers admin, custodian and management charges
69
what is an income plan structured deposits?
designed to provide stream of income payments paying monthly, quarterly or half yearly
70
4 ways to invest in commodities?
1) buying commodity directly
2) investing in companies that produce natural resources
3) investment through collective investment scheme or ETF
4) investment through derivatives
71
Advantages of commodities investment
1) spreads risk by diversifying investments
2) prices tend to not move in same direction as other asset classes
3) allows investor to include exposure to specific areas to take advantage of opportunities
4) hedge against inflation
72
Disadvantages of commodities
1). demand affected by business cycle
2) imbalances in supply and demand frequently occur leading to bull and bear markets
3) commodities are volatile
4) no income produced and storage costs
73
what are VCTS?
Quoted vehicles that aim to encourage investment in smaller unlisted UK companies, and companies listed on AIM
Pooled investments but difficult to sell due to liquidity issues
74
VCT Tax benefits
Dividend relief - exempt for up to £200,000
Income tax relief - 30% up to £200,000
disposal relief - capital gains made on disposal of shares in a VCT are free of CGT
75
EIS Tax benefits
- income tax relief at 30%
- maximum investment £2,000,000 (if £1,000,000 goes into knowledge intensive)
- CGT can be deferred by reinvesting gains
- IHT relief after 2 years
- no cgt charge on EIS Share profits
76
What are SEIS?
Tax advantaged venture capital scheme, similar to EIS, focused on even smaller companies than EIS
77
Tax treatment of SEIS?
- income tax relief up to maximum of £200,000 per year - given at rate of 50%
- cgt relief - can exempt 50% and defer other 50% of gain
- potential IHT relief after two years
78
what are business angels?
private investors who invest directly in private companies in return for an equity stake and perhaps seat on the companies board
79
4 types of ISA
1) cash
2) stocks and shares
3) innovative finance
4) lifetime ISA
80
LISA limit per year
4,000
81
7 fund sectors
1) mixed-asset funds
2) distribution funds
3) uk equity funds
4) overseas equity funds
5) fixed-interest funds
6) property funds
7) other funds
82
What are the two steps in asset allocation?
1) deciding the benchmark for the portfolio
2) making active investment decisions around the benchmark, often referred to as dynamic or tactical asset allocation
83
what data is needed to run an optimisation model?
1) returns of each asset classes
2) standard deviation of each asset class
3) correlations between each pair
84
issues with optimisation
1) forecasts for risk return and correlation if used may be incorrect
2) historical data for risk, return and correlation if used may be a poor indicator of the future
3) correlation in extreme market conditions is very different to normal conditions
4) transaction costs are often not incorporated
5) appropriate measure of risk is assumed to be standard deviation based on normal distributions
85
what is stochastic modelling?
applies mathematical technique to generate a probabilistic assessment of returns and volatility
generates thousands of outcomes based on probability
86
what should benchmarks be?
1) specified in advance
2) appropriate to managers investment approach and style
3) measurable so value can be calculated on a frequent basis
4) unambiguous in its construction
5) reflective of managers current investment options
87
what is value?
oldest style - based on premise that rigorous analysis can identify businesses whose value is greater than their market price.
88
what is GAARP?
based on finding companies with a long term sustainable advantage, in terms of business franchise, quality of management, technology or other factord
89
what is momentum?
aims to capitalise on existing trends in the market
90
what is momentum?
aims to capitalise on existing trends in the market
91
what is a centralised and decentralised approach?
centralised - a firm has an agreed investment policy that all of its investment managers follow
decentralised - a firm gives discretion to its investment managers to operate freely
92
what does CASS require?
1) make adequate arrangements to safeguard clients ownership rights, especially in the event of insolvency
2) prevent use of safe custody assets belonging to a client on the firms own account expect with clients consent
3) introduce adequate organisational arrangements to minimise the risk of loss
93
what is omnibus?
investments are all held in one account whereas designated is a designated account
94
what is legal entity identifier?
unique identifier for persons that are legal entities or structures, it is a code that is unique to that legal entity or structure and must be obtained if they wish the firm to act on their instructions
95
what are some of trustees duties under common law?
- exercise due diligence and prudence in exercising a power of investment
- demonstrate professional expertise
- act impartially
- administer trust property in best interest
- make trust productive e.g grow
- obtain advice where required
96
what is standard investment criteria?
imposes duty on trustees to have regard to the need for diversification and suitability
97
who can NMPIs be marketed too?
1) certified high net worth individuals
2) certified sophisticated investors
3) self certified sophisticated investors
98
Graham’s values test
1) adequate size
2) strong financial condition
3) earnings stability
4) dividend record
5) earnings growth
6) moderate price to earnings ratio
7) moderate ratio of price to assets
99
what is full replication?
requires each constituent of the index to be tracked in accordance with its index weighting. Most expensive method and only suitable for big portfolios
100
what is stratified sampling?
requires representative sample is securities from each sector of the index to be held, this method is less expensive than full replication but the lack of statistical analysis renders it subjective with potential bias
101
what is optimisation?
costs less than fully replicating index, but statistically more complex. uses sophisticated computer modelling technique to find a representative sample of those securities that mimic broad characteristics of index tracked
102
what is synthetic replication?
involves fund manager entering into a swap - an OTC derivative - with a market counterparty to exchange returns on index for payment
103
what are the three ways economic activity can be measured?
1) by the total income paid by firms to individuals
2) by individuals total expenditure on firms output
3) by the value of total output generated by firms
104
How is GDP calculated?
By adding together the total value of all goods and services produced domestically during a calendar year
105
when is the economy contracting?
when level of GDP falls compared with previous quarter
106
when is economy in a recession?
two successive quarters of declining GDP
107
when is economy expanding?
When GDP rises compared with previous quarter
108
common formula for GDP
C + I + G + (X-M)
109
4 stages of economic cycle
1) recovery
2) boom
3) slowdown or contraction
4) recession
110
what is the public sector net cash requirement?
Difference between governments expenditure and revenue receipts
111
what are leading indicators?
usually change before the economy as a whole changes, for example stock markets
112
what are coincident indicators?
change at approximately the same time as the economy and so provide information on the current state, GDP, industrial production and retail sales are examples of
113
what are lagging indicators?
usually change after the economy does. Unemployment is an example
114
what are the two components of balance of payments?
1) current account - deal with imports and exports of goods and services
2) capital and financial account - deals with foreign investments in the UK and UK investment abroad
115
what does the current account consist of?
1) visible trades - exports and imports of goods such as oils, agricultural products, other raw materials, machinery and transport equipment, computers, white goods and clothing
2) invisible trades - exports and imports of services such as international transport, travel, tourism and financial and business services
116
What four parts does the current account divide into?
Trade in goods
Trade in services
Investment income
Transfer payments
117
what does capital account measure?
all movement in and out of the country for investment
118
what does financial account measure?
covers transactions that result in a change of ownership of financial assets and liabilities between a countries residents and non residents
119
what are the UKs official reserves made up of?
foreign currencies
gold
IMF special drawing rights
UKs reserves tranche position
120
what happens if real exchange rate rises?
domestic goods become more expensive relative to foreign goods adversely affecting domestic production
121
what happens if real exchange rate falls?
domestic goods become relatively cheaper and demand for them increases
122
what is fiscal policy?
use of government spending and taxation to influence both the level of demand in the economy and the level of economic activity
123
what is monetary policy?
attempts to stabilise the economy by controlling interest rates and the supply of money
124
What is M0?
Narrow money, includes:
- notes and coins in circulation
- banks operational deposits with Bank of England
Reflects changes in economic cycle, but does not cause them as it has little effect on total national output or inflation
It is an indicator of consumer spending and retail sales
Growth in M0 indicates that consumer spending is buoyant
A contraction in M0 suggests consumers are behaving more cautiously
125
What is M4?
Broad money
includes notes and coins in circulation, plus all instant access and time deposit accounts of UK residents with UK banks and building societies
Includes deposits created by banks and building societies through their lending activities as well as deposits lodged in accounts by savers
Acts as an economic indicator:
- an increase in demand for loans will be reflected in a faster growth in M4
- rapid growth in money circulating in the economy is often interpreted as a build up of inflationary pressures
126
what is the MPc?
set interest rate strategy
meet 8 times a year and have 9 members
five from within the bank and four external
127
what is quantitative easing?
involved injection money directly into economy by purchasing government bonds from investors
128
what is quantitative tightening?
a process under which banks sell bonds previously acquired under QE and or allow their holdings to mature without replacement
129
what is cost push inflation?
if firms face increased costs and inelastic demand for their output, the likelihood is that these rising costs will be passed onto the end consumers
consumers will in turn demand higher wages from firms causing a wage price spiral to develop
130
what is demand pull inflation?
when the economy is operating beyond its full employment level of output, prices are pulled up as a result of an inflationary gap emerging
this excess demand can often stem from the optimism that accompanies rising prices
131
what is disinflation?
occurs when there is a decrease in the rate of inflation, with disinflation the prices of goods and services are still rising but there is a slowing of the rate at which they increase
132
what is deflation?
opposite of inflation and occurs as prices decline over time and the inflation rate becomes negative
consumers become reluctant to spend and buy items as they know they will be cheaper in the future
133
what is stagflation?
combination of stagnant growth, and inflation,
134
what is systematic risk?
also known as market risk, refers to the risk that there might be events that lead to a change in expected returns in the stock market generally. Affects the whole system and cannot be diversified against
135
what is non systematic risk?
also known as investment specific risk, it is the risk that there might be a change in expected returns as a result of some event or circumstance to a particular company or industry sector
can be diversified against
136
what is default risk?
refers to an issuer defaulting on their obligations to pay interest and capital
137
what is downgrade risk?
the risk that the market anticipates that a credit rating agency is going to downgrade a bond
138
what is credit spread risk?
if investors become nervous, there is a flight to quality. this means bonds issued by corporates will tend to underperform bonds issued by governments
139
what is credit spread risk?
if investors become nervous, there is a flight to quality. this means bonds issued by corporates will tend to underperform bonds issued by governments
140
what is counterparty risk?
refers to a situation in which the organisation with which an investment is placed, or the counterparty to a transaction fails
141
what is bail in risk?
governments and or central banks and institutions bailed out financial institutions at a cost to taxpayers;
with a bail in those with money in the bank may see their balance reduced
142
what is liquidity risk?
risk faced by investors when they are forced to sell a security at a price below its fair value due to a lack of liquidity
143
what is liquidity risk?
risk faced by investors when they are forced to sell a security at a price below its fair value due to a lack of liquidity
144
what is event risk?
refers to issuer of a security being unable to pay interest or repay capital or suffering a fall in value due to:
- a major unexpected events such as industrial disaster
- corporate change (such as takeover)
- regulatory change
145
what is gearing risk?
gearing risk is because gearing magnifies potential losses and gains
146
safety first ratio
expected return - threshold acceptable returns / standard deviation
147
what is modern portfolio theory?
reflects the way in which portfolios can be constructed to maximise returns and minimise risk
148
what is standard deviation?
measures how widely the actual return on an investment varies around its average or expected return. The greater the standard deviation, the greater the volatility
149
what is hedging?
means protecting an existing investment position by taking another position that will increase in value if existing position falls in value
150
what is the efficient frontier?
describes relationship between the return that can be expected from a portfolio and the risk of the portfolio as measured by the standard deviation
efficient frontier plots the risk reward profiles of various portfolios and shows the best return that can be expected for a given level of risk
151
limitations of efficient frontier
- it assumes standard deviation is the correct measure of risk and assumes assets have normally distributed returns
- investors may have concerns such as ethical preferences which add constraints
- inputs rely on historical data
- model doesn’t include transaction costs
152
how many securities are sufficient for diversification?
15 to 20
153
CAPM calculation
1) market return - risk free return
2) times this by the beta
3) add the risk free return back in
154
CAPM Assumptions
- investors are rational and risk averse
- all investors have an identical holding period
- market comprises many buyers and sellers
- no taxes, transaction costs and no restrictions
- information is free and is simultaneously available
- all investors can borrow and lend unlimited amounts of money at risk free rate
- quantity of risky securities in the market is fixed
155
limitations of CAPM
1) what to use as risk free rate
2) what is the market portfolio
3) the suitability of beta
156
what is fama and french model?
expands CAPM by adding factors for company size and value in addition to the market risk factor of CAPM.
Fama and french identified two types of company securities that tend to do better than the market as a whole:
1) small caps tend to outperform large cap stocks
2) value stocks (those with a high book value to price ratio) tended to outperform growth stocks
157
what is arbitrage pricing theory?
general theory of asset pricing that has become influential in the pricing of securities
it is based on the idea that a securities return can be predicted using the relationship between the security and a number of common risk factors, where sensitivity to changes in each factor is represented by a factor specific beta
158
what influences security returns?
1) unanticipated inflation
2) changes in the expected level of industrial production
3) changes in default risk premium on bonds
4) unanticipated changes in the return of long term government bonds over treasury bills
159
what is weak from EMH?
states that current security prices fully reflect all past price and trading volume information, and future prices cannot be predicted by analysing this type of historical data
160
what is semi strong efficiency?
states that security prices adjust to all publicly available information very rapidly and in an unbiased ways, so that excess returns cannot be earned by trading on that information.
161
what is strong form efficiency?
states that security prices reflect all the information that any investor can acquire, in this form, all information includes not only public information, but also private information typically held by corporate insiders
162
what is prospect theory?
deals with the idea that people don’t always behave rationally, particularly with respect to risk tolerance when facing a loss or making a profit
163
what is regret?
investors may be less willing to sell a losing investment because it is showing a loss
164
Holding period return
D + v1 - v0 / v0
165
Formula for relative return
return - benchmark return
166
Money weighted rate of return formula
If contributions:
1) D + V1 - V0 - C
2) Divide this by
3) V0 + (C x n/12)
If withdrawals:
1) D + V1 - V0 + C
2) Divide this by
3) V0 - (C x n/12)
167
time weighed rate of return
v1 / v0 x v2 / (v1 + c) - 1
168
time weighed rate of return
v1 / v0 x v2 / (v1 + c) - 1
169
sharpe ratio formula
return on the investment - risk free return / standard deviation
170
alpha formula
[Risk free + beta (market return - risk free return)]
171
information ratio formula
return - benchmark return / tracking error
172
Interest yield formula
coupon / clean price x 100
173
what is a statement of financial position?
shows the assets and liabilities of a company and can be seen as a list of resources
also known as a balance sheet
174
straight line depreciation formula
original cost - expected residual value / expected useful life
175
what is the income statement?
shows the performance of the company over the accounting period, or part of it, used to be known as profit and loss account
176
what is a cash flow statement?
seek to identify how a company’s cash has been generated over the accounting period and how it has been expended
177
what are subsidiaries?
owning more than 50% of shares
178
what are associates?
where a company has 20% - 50% shareholding or the investing company participates in or exercises significant influence over the management of another company
179
what are investments in terms of companies?
where company has less than 20% holding
180
operating margin formula
operating profit / sales x 100
181
net margin formula
net profit after tax / sales x 100
182
Return on equity formula
net profit after tax / total equity x 100
183
Return on capital employed formula
profit before interest and tax / capital employed x 100
184
Financial leverage formula
(Long term loans + preference shares) / total equity - preference shares
185
Interest cover formula
Profit before interest and tax / Gross interest payable
186
Working capital current ratio
Current assets / current liabilities
187
liquidity ratio
current assets - stock / current liabilities
188
Debtor turnover formula
Sales / debtors
189
Debtor collection period in days
debtors / sales x 365
190
stock turnover
cost of sales / stock
191
creditor turnover formula
cost of sales / trade creditors
192
Creditor payment in days
trade creditors / cost of sales
193
Earnings per share
net income / number of shares in issue
194
P/e ratio
share price / earnings per share
195
dividend yield
dividend per share / share price x 100
196
dividend cover
EPS / dividend per share
197
Price to book ratio
share price / NAV per share
198
Gordon’s Share price formula
dividend / (return required - dividend growth)
199
NAV formula
(total assets - liabilities - preference shares) / number of shares in issue
200
what is risk perception?
represents the clients personal opinion on the risks associated with making an investment, based on prior knowledge and experience
201
how long must a firm retain a client agreement?
for at least the duration of the client relationship
202
when does disinflation occur?
when there is a decrease in rate of inflation
203
what is a disadvantage of adopting tactical approach rather than strategic?
volatility of the portfolio could become higher than originally intended
204
what do pragmatists tend to use?
the historic range of returns to estimate future returns
205
sharpe ratio formula
Return - risk free / standard deviation
206
How to calculate alpha
1) market return - risk free return
2) x by beta + risk free return
deduct this from actual return
207
when considering the information ratio, the risk taken relative to the benchmark is called
tracking error
208
How to work out future value
1) (1+r) n-1
2) divide this by r
3) times it by present value
209
interest cover formula
profit before interest and tax / gross interest payable
210
what are descriptive statistics?
study of how data can be effectively summarised to provide information on a larger group of
211
what is statistical inference?
refers to making estimates or judgments about the larger group
212
what is a frequency distribution?
grouping of data into a number of non-overlapping classes or intervals, so that the number of observations in each interval can be counted and the data can be analysed
213
what is a histogram?
bar chart showing the absolute frequency on the vertical axis and intervals on horizontal
useful for displaying the form of the data distribution
214
what is a frequency polygon?
trend line showing the absolute frequency on the vertical axis and the interval midpoints on horizontal axis
215
what is a moving average?
statistical technique using averages for consecutive time periods to smooth out data
216
steps to calculate standard deviation
1) obtain arithmetic mean
2) obtain set deviations from the mean
3) square each deviation
4) divide the sum of the squared deviations by the number of observations to obtain the population variance
5) take the square root of the variance to obtain the standard deviation
217
standard deviation percentages
68.3% lie between 1 standard deviation
95.5% lie between 2 standard deviation
99.75% lie between 3 standard deviation
218
what is data mining bias?
when forecasting models are derived from searching through historic data for patterns or trading rules. Problems occur when a large number of models are tested but only successful ones are reported
219
what is selection bias?
occurs when certain data is excluded from the analysis, possibly because data wasn’t available
220
what is selection bias?
occurs when certain data is excluded from the analysis, possibly because data wasn’t available
221
what is a blind trust?
A blind trust is a form of bare trust. Here, the settlor remains the beneficial owner of trust property, but have no say in the management of the assets
222
Under the Investment Associations fund sector rules, a specialist hybrid property fund must not invest more than what percentage in direct property?
60%
223
what does the real exchange rate measure?
Measures the price of domestically produced goods relative to the price of foreign goods taking into account the exchange rate
224
What happens to exports if pound falls?
If the pound falls, exports become more competitive, increasing demand for them and pushing up the share price of exporters
225
what is event risk?
Refers to the issuer of a security being unable to repay interest or capital or suffering a fall in the value of their securities due to a major unexpected event or regulatory change
226
which two types of company security tend to do better than the market as a whole according to a study carried out by Fama and French?
Small cap and value stocks
227
Formula for total holding period
1) Any income + selling price - acquisition price
2) divided by acquisition price
228
Time weighted return formula
V1 / V0 x
v2 / (v1 + c) - 1
229
What does the FTSE All share index comprise of?
FTSE 100, FTSE 250 & FTSE smallcap
230
which method of measuring risk shows how consistent a manager is at beating a benchmark index?
information ratio
231
Future value formula
PV (1+r)n
232
Future value formula
PV (1+r)n
233
Annuity formula
Present value / by
1 - (1+r)-n / r
234
Formula for Earnings per share
profit attributable to ordinary shareholders / number of ordinary shares in issue
235
Dividend yield formula
Dividend per share / current share price x 100
236
A company is likely to be considered as having high operating leverage if fixed costs are above what percent?
80%
237
which type of organisation is accepted by the markets as running with lower liquidity than normally expected?
supermarkets
238
equities can be valued on four bases, which of the following is the correct description of these bases?
Dividend flows, earnings growth, net asset value and shareholder added value
239
what reports do listed companies have to publish?
annual reports
semi annual and interim
240
how can industry participants and investors share news and ideas?
online forums
241
AER Formula
(1+ r/n)n - 1
242
what is tier one capital ratio?
ratio that regulatory authorities use to judge the adequacy of a banks capital position
Higher the percentage the better
243
what are credit default swaps?
Cost of insuring a bank against default by using a CDS, which is a derivative that enables an organisation to protect itself against the risk of default by passing that exposure on to someone else
244
What are the Basel III rules?
International standards on the amount of capital held by banks
245
FSCS timescales?
majority within 7 days of a bank failing, more complex within 20 working days
246
what are treasury bills?
Issued by debt management office
finance short term cash needs
Routinely issued at weekly auctions
Maturities of one, three or six months
Minimum of £500,000
247
what are certificates of deposit?
receipts from banks for deposits placed with them.
have fixed rate interest, usually related to a reference rate such as sonia and have a fixed term to maturity
most issued with maturities of one to three months and interest paid on maturity
248
what is commercial paper?
short term money market funding instrument
issued by companies to fund day to day cash flows
issued at discount to maturity
typical maturity between 30 and 90 days
249
what are short term money market funds?
invested in short term debt, have weighted average maturity of no more than 60 days and a weighted average life of no more than 120 days
stable NAV
250
what are standard money market funds?
aim to make slightly higher returns than short term, therefore invest in extended maturity periods of six and 12 months
fluctuating NAV
251
what are eurobonds?
denominated in a currency different from the financial sector which they have been issued in
252
Formula to calculate conversion premium for convertible shares
(conversion ratio x market price of convertible shares / market price of ordinary shares) - 1 x 100
253
Bond Conversion formula
(market price of convertible stock / conversion ratio x market price of shares - 1) x 100
254
What is an offer for sale?
Most common form of issuing new shares. The process varies slightly depending on how and when the price is set
Where the company is large and stable an offer price can be fixed with confidence,
for some issues they are difficult to price so the issuer may decide to invite bids to help establish degree of interest before setting a strike price
255
What is an offer for subscription?
Special form of tender offer for sale, in that the issuer seeks bids above the minimum subscription level but does not commit to go through with it until certain level of demand is met
256
what is a placing?
Fastest and cheapest method of issuing new shares, often used as supplementary method
It is the most popular route for smaller companies
The company decides on a price and then reaches out to the big institutions and makes a sale presentation
257
What is a rights issue?
Companies may come back to raise additional share capital
all existing shareholders are offered a chance to subscribe to new share
258
what is open offer?
similar to a rights issue, but rights cannot be traded and shareholders are not usually compensated if they choose not to apply for entitlement of new shares
259
what is a bonus issue?
involves the company issuing further shares to its existing shareholders without raising any new funds
bonus issue is used to bring companies share capital more in line with real worth and to reduce share price to make it more marketable
260
main risks affecting equities
price risk
liquidity risk
issuer risk
261
Rental income yield calculator
Rental income / property price x 100
262
what is a future?
a future is an exchange traded contract to buy or sell an asset at a specified future date for a certain price. Price is predetermined at the time the contract is agreed and imposes open ended obligation on the holder until expiry or closing out
263
what is an option?
gives the holder the right but not the obligation to buy or sell an asset at a specified price on or by a future date
264
what is a swap?
a swap is an agreement between two parties to exchange a series of cash flows over a period of time . most common type is an interest rate swap, where one party swaps floating rates of interest for fixed rates
265
what is a call option?
the buyer has the right to buy the asset at the exercise price if they choose
266
what is a put option?
the buyer has the right to sell the underlying asset
267
when can american style options be exercised?
any time up until expiry
268
what is a warrant?
A warrant is a type of long term call option. The holder has the right but not the obligation to buy shares at a fixed price at a predetermined date or within a specified period
269
what is a futures and options fund?
funds permitted managers to invest in derivatives provided the transactions were covered by the underlying assets
they were launched as bull and bear funds from a handful of unit trust management groups
270
what are Geared futures and options funds?
permitted managers to invest up to 20% of the fund in derivatives markets
271
what are capital protected unit trusts?
In November 2002, the regulator gave the go ahead for the launch of limited issue funds. These allowed investment managers to market derivatives based funds, which for example, could offer a return of 80% of the rise in the FTSE 100
this has been largely superseded by structured retail products
272
what is spread betting?
seen by some as an alternative to conventional dealing in futures markets, stock markets and currencies, others see it as a form of gambling
placing bets requires an account with a spread betting firm, which offers quotes on a wide range of indices, equities, currencies and commodities
trading takes place on a margin allowing for high levels of leverage
273
what is binary betting?
another way of speculating on the markets
spread betting firm will quote prices say whether the FFSE100 will close up on a given day
If it does close higher binary bet will settle at 100, if lower binary bet settles at 0, hence name binary bet
FCA banned selling, marketing and distribution of binary options to retail investors in April 2019
274
what are hedge funds?
type of alternative investment
they pool investors money to invest, often using non traditional methods
generally do not adopt a long only strategy, the funds aim for absolute return with limited volatility rather than performance relative to an index benchmark
275
what are long / short funds in terms of hedge fund management
invest in equity and or bond instruments, and combine long investments with short sales of individual securities and derivatives
can operate with a bias towards either the long or short side or balance both in a market neutral approach
276
what are hedge fund relative value funds?
often said to adopt market neutral strategies because there is no market related element in their returns. Instead managers rely on arbitrage to produce returns
involves identifying and exploiting price anomalies between similar investments
277
what are typical trading funds?
relatively small part of the hedge fund universe, trade in currencies, bonds, equities and or commodities with the largest funds having sets of dedicated teams
278
what are structured products?
investment plans where the return is delivered at a defined point and is dependent on the performance of an index or asset and the terms of participation in the returns
279
what are structured deposits?
designed to return the investors original capital as a minimum at maturity
If issuer is authorised by the PRA, to issue deposits in the Uk, it includes the potential benefit of FSCS protection
280
what are capital protected products?
designed to return at least the original capital, regardless of how bad the stock market or underlying measure performs
they do not benefit from FSCS protection however
rarely been on offer
281
what are capital at risk products?
have the potential to produce much higher returns, but will give rise to a loss at maturity if the underlying investment performs poorly over the term
typically incorporate a barrier that protects capital until the stock market falls by a set amount
282
what are the components of a structured product?
zero coupon - used to repay capital at maturity
call options
charges
283
Tax benefits of VCTs
- Dividends from ordinary shares in VCTs are exempt from income tax up to £200,000 per year
- Income tax relief of upto 30% is available but is clawed back if shares are not held for 5 years
- Capital gains made on disposal of VCT shares are free of CGT
284
Tax advantages of EIS
- income tax relief up to 30%
- maximum total amount invested is
£2,000,000, so long as £1million is knowledge intensive
- CGT can be deferred by reinvesting gains
- no CGT charge on EIS Share profits
- income tax relief can be backdated
- shares usually qualify for 100% IHT business relief once held for 2 years, provided they remain unlisted
285
SEIS tax advantages
- income tax relief of upto 50% capped at £200,000, shares must be held for 3 years
- Any gain free of CGT
- CGT reinvestment relief - can roll half of gain with full CGT exemption and defer other half
- IHT relief after 2 years
286
Three common areas to be considered when deciding on asset allocation
1) timescale - how long will the investor be invested
2) acceptable level of loss
3) need for income
287
what are the two steps in asset allocation?
1) deciding the benchmark for the portfolio
2) making active investment decisions around the benchmark referred to as dynamic or tactical asset allocation
288
what data is needed to run an optimisation model?
1) returns of each asset class
2) standard deviations of each asset class
3) correlations between each pair of asset classes
289
issues with optimisation models
1) forecasts for risk, return and correlation could be wrong
2) historical data may be a poor indicator for the future
3) correlation in extreme conditions is often very different to those in normal conditions
4) standard deviation is based on normal distribution
5) transaction costs not incorporated
290
what are core property funds?
usually open ended and lower risk and lower return funds, aiming to produce returns benchmarked against an established property index
291
what are core plus and value added property funds?
use higher gearing and more active management styles to generate higher returns
292
what are opportunistic funds?
typically closed ended and aim to exploit opportunities to acquire property from distressed sellers, redevelopments and property in emerging markets. Closer in nature to private equity funds
293
what are property unit trust funds?
exempt from corporation tax on any gains they make, but the income arising in the fund is liable to corporation tax at a special rate of 20%
They are designed for the domestic UK market and their unfavourable tax treatment means they are unsuitable for institutional and overseas investors
294
what are property unit trust funds?
exempt from corporation tax on any gains they make, but the income arising in the fund is liable to corporation tax at a special rate of 20%
They are designed for the domestic UK market and their unfavourable tax treatment means they are unsuitable for institutional and overseas investors
295
what is a PAIF?
OEIC that specialises in holding property and in which the taxation of profits from its property business lies with the investors
296
Advantages of property funds
1) attractive absolute returns
2) potential for high income rental yields
3) portfolio diversification
297
Disadvantages of property funds
1) lack of liquidity
2) volatility
3) costs
298
Graham’s value tests
1) adequate size
2) strong financial condition
3) earnings stability
4) dividend record
5) Earnings growth
6) moderate price to earnings ratio
7) moderate ratio of price to assets
299
what are high yield funds?
required to have at least 80% of assets in bonds rated less than BBB minus.
300
how to calculate GDP?
Add together total value of all goods and services produced domestically during a calendar year
301
Under COBS, how does the frequency of reporting differ between advisory management services and DMS services?
Advisory must be at least annually
DMS must be at least every three months
302
what is a core satellite approach?
contains passive managed assets as the core with the remainder actively managed
303
what is a countries real exchange rate?
domestic goods relative to foreign goods, taking into account the exchange rate
304
what is total loss in a portfolio?
risk of the portfolio losing its entire value during the investment period
305
what can MPT be used for?
to identify a potential return for a set level of risk
306
if two different investment portfolios both rest on a typical efficient frontier curve at different points, this normally shows that compared to each other they have?
the potential for different maximum returns given different levels of risk
307
the companies permanent capital is represented by
the share capital and reserves
308
Earnings per share formula
income - preference dividends / number of ordinary shares in issue
309
Price to book ratio
share price / NAV
310
ROCE Formula
Profit / capital employed
311
CAPM assumptions
- Investors are rational and risk averse, making decisions on the basis of risk and return alone
- all investors have an identical holding period
- market comprises many buyers and sellers, and no one individual can affect the market price
- there are no taxes, no transaction costs and no restrictions on short selling
- information is free and is simultaneously available to all investors
- all investors can borrow and lend unlimited amounts of money at the risk free rate
- quantity of risky securities in the market is fixed, and all are fully marketable
312
what influences on securities returns?
1) unanticipated inflation
2) changes in expected level of industrial production
3) changes in the default risk premium on bonds
4) unanticipated changes in the return of long term government bonds
313
what is weak form efficiency?
states that current security prices fully reflect all past price and trading volume information, and future prices cannot be predicted by analysing this type of historical data
therefore technical analysis which charts historical trading data and looks for trends, is of no use in determining future prices
314
what is weak form efficiency?
states that current security prices fully reflect all past price and trading volume information, and future prices cannot be predicted by analysing this type of historical data
therefore technical analysis which charts historical trading data and looks for trends, is of no use in determining future prices
315
what is semi strong efficiency?
This states that security prices adjust to all publicly available information very rapidly and in an unbiased way
316
what is strong form?
states security prices reflect all the information that any investor can acquire, not only public information but also private information
317
what is free float?
Number of shares available for trading on the market
318
Holding period return formula
D + V1 - V0
319
Holding period return formula
D + V1 - V0
320
what is relative return?
return from an investment or portfolio measured against the return from a benchmark index, shows how well the investments have done relative to the return of the benchmark index
321
formula for relative return
holding period return - benchmark return
322
Money weighted return formula
D + V1 - V0 - C
323
Money weighted return formula
1) D + v1 - v0 - c
/
3) v0 + (c x n/12)
324
what does a low dividend yield mean?
A dividend yield provides an indication of a companies perceived ability to grow its dividends. A low dividend yield implies high future dividend growth, whereas the opposite is true of a high dividend yield
325
What is ROE?
measures returns companies achieve on the funds provided by shareholders
makes possible comparisons with other investments such as bonds and deposits
326
what does P/e ratio measure?
How highly investors value a company in its ability to grow its income stream
327
what is the information ratio used for?
to assess the risk adjusted performance of active portfolio managers. It is often used to gauge the skill of fund managers and shows the consistency with which a manager beats a benchmark index
328
what does a negative information ratio mean?
means an investor would probably have achieved a better return by matching the index using a tracker or index fund
329
what does sharpe ratio measure?
measure of how well the return on an asset compensates the investor for the risk taken
330
what is alpha?
difference between the return you would expect from a security, given its beta, and the return that it has actually produced
331
what is descriptive statistics?
Study of how data can be effectively summarised to provide information on a larger group
332
what is statistical inference?
refers to making estimates or judgements about a larger group of data
333
Formula for Compound Interest
PV(1+r)n
334
Present value formula
FV / (1+r)n
335
Future value regular investment formula
P
x by
(1+r)n - 1 / r
336
what is real return?
nominal return - inflation rare
337
what is a strategic report?
most uk companies must now prepare a strategic report as well as a directors report within their annual report
The purpose of the report is to provide a companies shareholders with a holistic and meaningful picture of a companies business model, strategy, development, performance, position and future prospects
338
what are IFRS?
international financial report standards issued by the International accounting standards board
339
What is an audit report?
Gives an opinion on whether or not the accounts give a true and fair view of the companies activities and financial position and if so, they will issue an unqualified audit report, if not then the auditor must qualify the report
340
what is disclaimer of opinion?
where auditor is unable to form an opinion owing to a considerable amount of uncertainty surrounding the outcome of a particular event
341
what is an adverse opinion?
where auditor disagrees with an accounting treatment or a view made in the statements, which the directors refuse to amend
342
what is an audit qualification?
where the auditor has material disagreement with the treatment adopted by the directors or material uncertainty that limits the scope of the audit option
343
what is the statement of financial position?
shows the assets and liabilities of a company and can be seen as a list of resources of the company and how they have been financed
344
what is retained earnings?
revenue reserve. represents the accumulation of the companies distributable profits that have not been distributed to shareholders as dividends or transferred to a capital reserve but have instead been retained in the business
345
what is the income statement?
shows the performance of the company over the accounting period or part of it,
details how companies profit was arrived at and states how much has been earned and distributed
346
what is a cash flow statement?
seek to identify how a companies cash has been generated over the accounting period and how it has been expended
347
what is the operating margin formula used for?
It provides information about the profitability of a firms core business
348
formula for operating margin
operating profit / sales x 100
349
what does net profit margin measure?
Also called profit margin, measures the percentage of net income of an entity to its net sales. It represents the proportion of sales that is left over after all relevant expenses have been deducted
it is used to compare profitability of competitors in the same industry,
350
Net profit margin formula
net profit after tax / sales x 100
351
What is ROE?
It is the ratio of net income of a business during a year to its shareholders equity during that year. it is a measure of profitability of the shareholders investment
So it measures the percentage return the company is achieving on the amount of funds provided by shareholders
with care, ROE makes comparisons with other investments such as bonds and deposits, but ROCE is a better comparison between companies as ROE is heavily affected by differences in company capital structure
352
Formula for ROE
net profit after tax / total equity x 100
353
what is ROCE
Determines how much the company has earned from the total of the different types of capital it has employed, such as equity or long or short term borrowings
since ROCE includes long term finance in the calculation, it is a more comprehensive test of profitability compared to ROE
but one limit is that it does not account for depreciation and amortisation of the capital employed
354
ROCE Formula
profit before interest and tax / capital employed x 100
355
profitability measurements per industry’: retail; distribution; airlines, creative companies?
1) retail companies - profits per square foot
2) distribution companies - profits per ton mile
3) airlines - profits per passenger per mile
4) creative companies - profits per employee
356
Gearing formula
(long term loans + preference shares) / (total equity - preference shares)
357
Interest cover tells us?
how many times over the interest bill could be paid out of current profits
the formula is:
profit before interest and tax / gross interest payable
358
working capital (current) ratio
current assets / current liabilities
359
Liquidity ratio formula
current assets - stock / liabilities
360
Debtor turnover formula
sales / debtors
361
debtor collection period in days
debtors / sales x 365
362
stock turnover formula
cost of sales / stock
363
creditor turnover formula
cost of sales / creditors
364
creditor payment period in days
trade creditors / cost of sales x 365
365
Limitations of ratio analysis
- changes in accounting periods can make it difficult
- based on historical data
- only as good as information source
- individual ratios shouldn’t be considered in isolation
- ratio analysis is concerned with trends over time
366
what is EPS?
measure of the profitability of a company that is expressed in an amount per share so meaningful comparisons can be made
quality of a companies earnings stream and ability to grow its EPS are probably most important factors affecting share price
367
Three versions of EPS
1) basic EPS
2) earnings before interest and tax
3) earnings before interest, tax, depreciation and amortisation
368
EPS formula
Net income / number of shares
369
price earnings ratio
measures how highly investors value a company in its ability to grow its income stream
Share price / EPS
370
Dividend yield
gives investors an indication of the expected return on a share so it can be compared to other shares and investments
dividend per share / share price x 100
371
Dividend cover
considers ability of company to continue paying such a level of dividend
EPS / dividend per share
372
Price to book ratio
measures the relationship between the companies share price and the net book,
share price / NAV
373
Share price formula
dividend / return required - dividend growth
374
NAV formula
total assets - liabilities - preference shares / number of shares in issue
375
Information ratio formula
portfolio return - benchmark return / tracking error
376
Sharpe formula
expected return - risk free rate / standard deviation
377
convertible preference shares formula
(ratio x price of convertible) / share price - 1 x 100
378
Put warrant payout
strike price - underlying price / parity
379
working capital formula
current assets - liabilities
380
warrant gearing
share price / warrant price
381
When do contract notes need to be issued?
as soon as possible and no later than the business day following execution of the trade
382
how often do discretionary firms need to report?
periodic reports must be issued every quarter or every month if leveraging is used
383
what does section 5 of the trustee act impose?
statutory duty to obtain advice
384
Calculate time weighted return
1) start with period 1, take the end value, divide this by the start value
2) period 2, divide the end amount by the starting value and any contributions
Multiply these two returns together, - 1 x 100
385
dividend yield formula
dividend per share / share price
386
Dividend cover formula
EPS / dividend per share
387
if dividend cover is high, what does this suggest?
The higher the figure, the more likely a company can maintain the existing dividend if profits fall
388
formula for working out what investment is needed now
FV / (1+r)n
389
2 main ways to reduce risk?
hedging out risk or diversifying portfolio holdings
390
what is weak form efficiency?
States that current security prices fully reflect all past price and trading volume information, and future prices cannot be predicted by analysing this type of historical data and looking for trends.
391
what is semi strong efficiency?
states that security prices adjust to all publicly available information very rapidly and in an unbiased way
so that excess returns cannot be earned by trading on that information
so a companies financial statements are of no help in forecasting future price movements and excess returnd
392
what is strong form?
states that security prices reflect all the information that any investor can acquire, in this form, all information includes not only public information but private information
393
at what inflation rates must the bank write to the chancellor
if inflation falls below 1% or above 3%
394
what does the information ratio assess?
the risk adjusted performance of active fund managers
395
which rate of return formula allows for comparisons to be made between the performance of one fund manager and that of another?
Time weighted rate of return
396
regarding mean and median, what is true regarding normal distribution
mean and median are equal
397
3 main types of IPo
1) offers for sale
2) placing
3) introductions
398
options under a rights issue
1) subscribe for new shares and pay full amount
2) sell rights in the market
3) sell enough to generate cash to take up remainder
4) lapse - company sells and distributes proceeds after cost
399
What are bonus shares?
Used to bring share capital more in line with real worth
Reduced share price to make it more attractive
shares are issued fully paid to shareholders
also called scrip issue
400
what are indices used for?
compare particular share to overall market
compare fund managers performance to overall market
401
what is the FTSE all share?
aggregates:
- FTSE100
- FTSE250
- FTSE Smallcap
402
what is FTSE100?
100 largest companies by capitalisation
403
what is FTSE250?
next 250 companies by capitalisation below the FTSE100
404
what is FTSE350?
combines FTSE100 and FTSE250
405
what is FTSE Fledging?
companies too small to qualify for FTSE All share
406
US Indices
Dow Jones - 30 blue chip companies
S&P - composite 500 companies
NASDAQ - small, young companies
407
Japan
Nikkei225 - average of 225 stocks
Tokyo stock exchange
408
Germany indice
DAX - 30 largest companies
409
France index
CAC 40
410
What does EPS tell us?
The amount in pence the company earned during the year for each ordinary share
411
formula for EPS
profit attributable to ordinary shareholders / number of ordinary shares in issue
412
what does dividend yield measure?
measures the yield as a percentage return on the share price
413
formula for dividend yield
dividend per share / share price x 100
414
what does dividend cover measure?
how many times the dividend can be paid out of available current earnings
415
formula for dividend cover
EPS / dividend per share
416
what does price earnings ratio measure?
measures how highly investors value the earnings of a company
417
P/e ratio formula
share price / EPS
418
Price to book formula
share price / NAV
419
Disadvantages of investment formulas
- different accounting policies between companies make comparisons difficult
- change of accounting policy over time makes ratios misleading
- ratios based on historic data
420
what is GNP?
gdp but includes contribution made from overseas nationals
421
fixed interest - reactions to economy
- attractive when inflation and interest rates are low and falling
- price falls when economy is booming
422
what is M0?
notes and coins in circulation plus banks operational deposits with the bank of england
narrow money
423
what is M4?
broad money - notes and coins in circulation plus the bank accounts of UK residents with UK banks and building societies, and deposits created by banks and building societies through lending activity
424
what is quantitative easing?
banks buy back gilts and corporate bonds to increase UK money supply - so to bring liquidity to financial markets and increase banks lending capacity
425
what is disinflation?
decrease in rate of inflation but prices are still rising
426
what is deflation?
prices declining over time and inflation becomes negative
consumers defer purchases and manufacturers reduce output
427
what is stagflation?
combo of stagnant growth and inflation
428
what is the current account?
made up of transactions in goods (visible trade) and services (invisible trade)
429
what is the capital account?
records all movement of money into and out of the country for investment
430
what is the efficient frontier?
relationship between return from portfolio and risk of portfolio
set of portfolios that show the maximum rate of return for given levels of risk
431
assumptions of CAPM
- information is free and available
- investors are risk averse / rational
- no individual can affect market price
- identical holding period
- no taxes, transaction costs
432
Limitations of CAPM
- totally risk free return required
- true market portfolio required
- beta suitability - needs to be stable and predictable
433
APT
security returns can be predicted using relationship between security and common risk factors
434
factors influencing security of returns
unanticipated inflation
changes in industrial production
changes in default risk premium on bonds
unanticipated changes in return of long term government bonds over treasury bills
435
Annuity formula
1) P /
2) (1+r)n-1 / r
436
VCTs tax treatment
- 30% income tax relief upto £200,000
- relief withdrawn if held for less than 5 years
- dividends exempt from income tax
- no cgt deferral available
- no cgt on disposal
- losses not allowable for CGT purposes
