March 2024 Flashcards
Outline nine factors that Silvia would take into consideration when conducting the
annual review with Tadeusz. (9 marks)
• Change in needs/objectives/circumstance/income & expenditure.
• Change in health
• emergency fund.
• Liabilities.
• Any gains/use of CGT annual exemption/ISA allowance/ AA/DA/PSA availability.
• Changes in legislation/Budget/taxation.
• Performance against benchmark/target.
• On-going suitability.
• AtR/CfL.
• ESG/ethical considerations.
• Level of service/advice proposition/adviser charges.
• Market/economic outlook.
• Any additional capital/money to invest/inheritances.
Describe what beta represents and what it measures. (4 marks)
• Beta represents market/systematic risk;
• a measure of volatility;
• movement/correlation/sensitivity;
• relative to/explained by the market.
Explain briefly the limitations of using beta as a measure of risk. (3 marks)
• Measures market risk/return alone/ignores other factors.
• Assumes risk-free rate is correct/suitable.
• Not stable/not consistent over time.
• Not an accurate predictor of future return/based on historical data.
Identify the main differences between GAARP and growth investing. (3 marks)
• Lower P/E /PEG ratios than growth.
• Avoid excessive valuation/only pay fair price.
• Not pure growth/mix of value and growth.
State the two main risk-adjusted ratios used to analyse an actively-managed fund and explain briefly what each ratio measures. (6 marks)
• Sharpe Ratio
• Excess return for every unit of risk/risk-free rate.
• Excess return over standard deviation.
• Information Ratio
• Excess return over benchmark/in relation to tracking error.
• Consistency of manager.
State the main rules that a fund must adhere to in order to qualify as a real estate investment trust (REIT). (8 marks)
• UK resident/listed.
• Closed-ended/only one share class.
• Property rental/ring-fenced business;
• at least 75%;
• of total gross profits;
• of total value of assets.
• Interest on borrowing covered;
• at least 125%;
• by rental profits.
• Distributes;
• at least 90% of exempt profits;
• within 12 months of accounting period.
State the two types of income payment that can be made by a REIT and describe
their tax treatment if received by Tadeusz within the GIA. (8 marks)
• PID
• Paid net of 20%/BRT.
• PSA not available.
• Dividend
• Paid gross.
• Dividend allowance
Outline four benefits of introducing commercial property to the asset allocation of Tadeusz’s GIA portfolio. (4 marks)
• Increase diversification/reduced systematic risk.
• Reduced positive correlation/increased negative correlation/move toward non-
correlation.
• Reduced equity market/volatility risk.
• Increased income.
• Hedge against inflation/real asset.
Identify four main risks when investing in physical commercial property through
open-ended collective funds and state one reason for each risk (8 marks)
• Liquidity
• Fund forced to sell properties/limited cash within OEIC/properties hard to sell.
• Accessibility
• Unable to access money/fund gated/dealing suspended.
• Pricing
• Swing pricing/pricing basis changes/dilution levy applied.
• Valuation
• Material uncertainty/unable to provide NAV.
• Void
• Loss of tenant/property empty.
• Income
• Loss of yield/unable to collect rent/reduction in rent.
Describe briefly the objective of Stochastic modelling. (5 marks)
• Forecast/predict the;
• probabilistic/potential;
• range of;
• returns/outcomes;
• using volatility/standard deviation;
• under different scenarios/simulations.
State four of the main assumptions used in portfolio optimisation (4 marks)
• Risk.
• Historical data.
• Forecasts.
• Costs.
• Implementation
Identify four main drawbacks of using Stochastic modelling. (4 marks)
• Assumptions unrealistic/highly sensitive to changes in inputs.
• Over-reliance/over-confidence in output.
• Output unrealistic/unattainable.
• Difficult to understand/too complex.
• Not client-specific
Describe what is meant by GDP and what it measures. (5 marks)
• Monetary value/total;
• of all final goods/output;
• and services;
• of an economy/a country;
• over a quarter/year.
• Measure of the size;
• and growth of the economy.
Explain briefly from an investment perspective the consequences of
globalisation (4 marks)
• Increased interconnectivity of trade/economies.
• Increased correlation of equity markets.
• Market risk harder to diversify/reduced diversification of equities.
• International exposure through domestic listed companies.
• Increased volatility risk.
• Greater sensitivity to political policy/events.
• Markets increasingly efficient/harder to generate alpha/greater index investing.
• Increased competition for/allocation of investment capital.
Explain briefly the tax treatment of friendly society policies within the fund and in the hands of the investor. (4 marks)
Within the fund
• Interest/dividends;
• capital gains;
• are tax-free.
Hands of the investor
• Investment growth is tax-free/free of personal taxation.
Identify five benefits of investing in a frontier markets equities fund, compared
to holding direct UK equities. (5 marks)
• Reduction in systematic risk.
• Reduction/removal of non-systematic risk.
• Geographical diversification.
• Exposure to higher growth economies/potentially higher returns.
• Potential returns from currency movements.
• Professional management.
• Potential for alpha/frontier markets not efficient.
• FSCS/investor protection.
• Reduced administration/less involvement.
State the main stages of the top-down investment process for a frontier
markets equities fund. (3 marks)
• Geographical allocation.
• Sector weightings.
• Individual stock/security selection.
Explain briefly the main investment-related factors that George and Rosemary
would take into consideration when deciding whether to choose active or
passive strategies for the investment into a collective fund. (7 marks)
Active
• Fund style/objective/mandate.
• Manager track record/expertise.
• Alpha/IR/Sharpe/does active justify the cost?
Passive
• Replication strategy/tracking error.
• Is market efficient?
• Counterparty risk.
Either
• Costs/charges.
• Choice/use of index/benchmark.
State four main benefits and four main drawbacks of using a stocks and shares ISA as a long-term savings vehicle for retirement, compared to a personal pension plan. (8 marks)
Benefits
• Accessible at any time/before age 55/57.
• 100% tax-free lump sum.
• No need for/not linked to earnings.
• No tax on any income withdrawal.
Drawbacks
• No Income Tax relief/employer contributions.
• Lower investment limit/no carry forward/AA is £60,000.
• can’t write under trust.
• Funds not ‘earmarked’ for retirement/can spend at any time.
• ISA limited to £85,000 FSCS.
State three ways in which an investment trust can raise capital. (3 marks)
• Rights issue/open offer.
• Placement.
• Borrowing/gearing.
• Issue bonds.
Describe briefly the concept of dilution in relation to the investment trust. (3 marks)
• Company issues new shares/number of shares increase.
• Existing shareholders;
• own less of company/shares worth less/NAV per share falls;
• unless buy additional/new shares.
State the time limits for reinvestment of the proceeds into an EIS within which
CGT deferral relief would be available to Kambiz (3 marks)
• Up to 3 years;
• after sale
• Up to 1 year;
• before sale.
Outline the main differences between the tax treatment of an EIS and a VCT, if Kambiz wanted to invest some of the sale proceeds into either product. (5 marks)
• VCT no CGT deferral relief/EIS CGT deferral relief.
• VCT dividends tax free/EIS dividends taxable.
• VCT new gain exempt CGT immediately/EIS gain exempt after 3 years.
• VCT no loss relief/EIS loss relief available.
• VCT no business relief/EIS business relief available.
• VCT minimum period to retain Income Tax relief 5 years/EIS 3 years.
• VCT no carry back/EIS carry back available.
Identify three main benefits of investing into an EIS portfolio compared to a single
company EIS. (3 marks)
• Non-systematic risk can be reduced.
• Can invest across multiples sectors.
• Professional manager expertise/experience.
• All research, selection and investment decisions made by manager.
• Invest across different stages of underlying companies.
Identify three main drawbacks of investing into an EIS portfolio compared to a single
company EIS. (3 marks)
• Investment not pooled/not technically a fund.
• Less visibility.
• Increased paperwork/administration/HMRC reporting.
• Low number of investment companies/non-systematic risk not removed.
• Additional layer of charges/discretionary management expensive.
