MOCK Brand 23/24 Flashcards by Adrian Solem

Amelia is considering an investment in an Enterprise Investment Scheme (EIS). Which of the following are tax advantages of her doing so? (Tick all that apply.)

A. Gains arising on disposal are exempt from CGT if she holds the shares for 5 years.
B. Income tax relief is given as a reduction in her liability.
C. She has the ability to defer a capital gain through reinvesting the gain into an EIS company.
D. She has the ability to carry back half the investment to the previous tax year (subject to a maximum of £50,000).

B. Income tax relief is given as a reduction in her liability.
C. She has the ability to defer a capital gain through reinvesting the gain into an EIS company.

Rationale
Correct. The income tax relief for investment into an EIS is given as a reduction to the investor’s tax liability. The income tax relief can be carried back to the previous year subject to the overriding limit for relief for each tax year (there is not a specific £50,000 limit). Gains are exempt from CGT if the shares have been held for at least 3 years. Any capital gains can be deferred through reinvestment into an EIS. - Chapter 8, Section D1A, Learning Outcome 6.2

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A retail client is considering structured products. The potential drawbacks they should be aware of are that (Tick all that apply.)

A. capital protection could be lost in the event of significant falls to the index.
B. caps on participation rates limit returns.
C. there is no exposure to a manager’s ability.
D. the degree of upside participation is explicitly stated.

A. capital protection could be lost in the event of significant falls to the index.
B. caps on participation rates limit returns.

Answers a) and b) are potential drawbacks as returns from the underlying investment are capped (unlike a direct investment) but are explicitly stated at outset and significant falls to an index could result in a loss of capital protection. The other answers are benefits in as much as the degree of upside participation is explicitly stated and generally there is no exposure to a manager’s ability (unless it is linked to a fund). - Chapter 8, Section K3, Learning Outcome 6.2

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Tanya has two unit trusts. She has received income from them as follows

Unit Trust A
Unit Trust B
Interest of £200
Dividend of £300
If Tanya is a higher rate taxpayer, how much income tax will she pay assuming she has used all her dividend allowance and none of her personal savings allowance?

A. £97.50
B. £101.25
C. £118.05
D. £120.00

B. £101.25

Rationale
Correct. As Tanya has a £500 personal savings allowance, there will be no income tax due on the interest from unit trust A. As she has used her dividend allowance and she is a higher rate taxpayer, she will pay 33.75% income tax on the dividend from unit trust B = £300 x 33.75% = £101.25. - Chapter 7, Section C10, Learning Outcome 6.2

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Which of the following purchases of property would NOT be liable for stamp duty land tax?

Name Scenario Purchase Price
Yvonne First-Time Buyer £575,000
Simone Buyer buying a second ‘buy to let’ property £125,000
Andrea Non-residential property £140,000
Elizabeth Commercial property £160,000

A. Yvonne.
B. Simone.
C. Andrea.
D. Elizabeth.

C. Andrea.

The answer is (c) because Stamp Duty Land Tax (SDLT) is taxable at 0% on commercial (i.e. non-residential) property up to £150,000.

First time buyers pay no SDLT on the first £425,000 of the purchase price, however no relief is available where the total purchase price is more than £625,000.

Purchases of buy-to-let and second homes are charged to SDLT on purchases over £40,000. - Chapter 2, Section B3A, Learning Outcome 1.1

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The type of investment fund that would invest in short-term money markets such as bank deposits and treasury bills is a

A. building society fund.
B. gilt or fixed interest fund.
C. property fund.
D. cash fund.

D. cash fund.

A life office cash fund will typically invest in short-term money markets such as bank deposits and treasury bills to produce a steady, secure income. A building society fund also aims for a secure income but does this by investing in building society accounts. - Chapter 8, Section A9, Learning Outcome 6.2

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Joshua and Janine are both higher-rate taxpayers. Joshua encashes a corporate bond with a gain of £20,000. Janine encashes a unit trust with a gain of £25,000. Janine has already used her Capital Gains Tax (CGT) annual exempt amount in the current tax year, but Joshua has not. What will be their combined liability to CGT?

A. £3,270
B. £5,000
C. £6,540
D. £7,800

B. £5,000

Janine’s unit trust would be subject to Capital Gains Tax. A gain of £25,000 with no CGT annual exempt amount would be taxed at 20% for a higher-rate taxpayer, i.e., £5,000. Corporate bonds are not subject to CGT; therefore, Joshua has no CGT liability. The correct answer is therefore £5,000. - Chapter 7, Section C11, Learning Outcome 6.2

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A limited company has a high price earnings ratio compared to the sector average; this might suggest that the (Tick all that apply.)

A. company is not greatly favoured by investors.
B. growth prospects of the company are poor.
C. company has great expectations for growth.
D. the shares of the company are in great demand.

C. company has great expectations for growth.
D. the shares of the company are in great demand.

The price earnings ratio is based on the relationship between the share price and the earnings per share. It is a measure of how highly investors value the earnings of a company. A high p/e ratio might indicate that the company has great expectations for growth and that the shares are in demand. Both would impact the share price and increase the p/e ratio. - Chapter 2, Section A5D, Learning Outcome 1.2

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What primary factors determine the rate of interest paid to an individual? (Tick all that apply.)

A. The level of risk taken e.g., gilts versus corporate bonds.
B. Notice period on deposit accounts.
C. The age of the individual.
D. The tax status of the individual.

A. The level of risk taken e.g., gilts versus corporate bonds.
B. Notice period on deposit accounts.

One of the primary factors determining the rate of interest paid is the level of risk taken - usually the higher the risk, the higher the return e.g. corporate bonds usually have a higher yield than gilts as the risk is greater. Another factor is the notice period on deposit accounts - usually the longer the notice period, the higher the return. - Chapter 1, Section B3B/C8, Learning Outcome 1.1

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Which of the following is a measure of UK consumer price inflation that includes owner occupiers’ housing costs?

A. CPIH.
B. RPIJ.
C. RPIX.
D. RPI.

A. CPIH.

CPIH is the measure of UK consumer price inflation that includes owner occupiers’ housing costs. - Chapter 6, Section G, Learning Outcome 5.1

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Which of the following is the main potential advantage of a geared portfolio?

A. Potential to magnify returns.
B. Increased concentration.
C. Reduced risk due to diversification.
D. Increased liquidity.

A. Potential to magnify returns.

Gearing is basically borrowing to invest. Where returns are positive, it has the potential to increase them significantly, since the amount to be repaid is fixed at outset. However, the reverse is also true in that it can also significantly magnify losses. - Chapter 6, Section D4, Learning Outcome 5.2

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Fund A has a return of 12%, a benchmark return of 10%, and a tracking error of 6%. Fund B has a return of 11%, a benchmark return of 10%, and a tracking error of 5%. From this information, you can say that the (Tick all that apply.)

A. higher the positive information ratio, the higher the value added by the fund manager through active management.
B. information ratio for fund A is 0.33.
C. information ratio is used to assess risk-adjusted performance.
D. fund manager of fund B has added the most value.

The information ratio is used to assess the risk-adjusted portfolio of active portfolio managers. The higher the positive information ratio, the higher the value added by the fund manager. The information ratio is calculated as (Rp - Rb) / Tracking error, where Rb is the benchmark return and Rp is the portfolio (or fund) return, so:

Information ratio for fund A = (12% - 10%) / 6% = 0.33

Information ratio for fund B = (11% - 10%) / 5% = 0.2

Therefore, answer (a), (b), and (c) are all correct and answer (d) is incorrect, as the fund manager of fund B has a lower information ratio and therefore has not added as much value as the manager of fund A. - Chapter 11, Section B2C, Learning Outcome 9.1

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Anthony invested £60,000 into a life assurance investment bond 5 years ago; he has made the following withdrawals

Year Withdrawal
1 £2,000
2 £4,000
3 £2,000
4 £4,000
5 £4,000
In which year(s) has Anthony made a chargeable gain?

A. Years 3 only.
B. Years 3 and 4.
C. Year 4 only.
D. Year 5 only.

D. Year 5 only.

A chargeable gain occurs if Anthony takes more than a 5% withdrawal in a policy year (5% of £60,000 = £3,000); this is a cumulative allowance. As we can see from the table below, the 5% allowance is only exceeded in year 5.

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The standard deviation on Rhona’s portfolio is 4%, with the mean return being 6%. We can conclude from this that roughly 68% of returns will fall between

A. 2% and 10%.
B. 4% and 6%.
C. - 2% and 14%.
D. -6% and 18%.

A. 2% and 10%.

As a rule of thumb, roughly 68% of returns can be expected to fall within one standard deviation of the mean (i.e., 2% to 10%) and roughly 95% of returns will fall between two standard deviations (i.e., -2% to 14%). - Chapter 4, Section A1, Learning Outcome 3.2

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If a company has earnings per share of 50p and the dividend per share is 23p, what is the dividend cover?

A. 27
B. 73
C. 2.17
D. 0.46

C. 2.17

A company’s dividend cover measures how many times the dividend could be paid out of the current earnings. If a company has earnings per share of 50p and the dividend per share was 23p, the dividend cover is 50p / 23p = 2.17. - Chapter 2, Section A5C, Learning Outcome 1.2

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Helga holds preference shares in a listed company. She should be aware that (Tick all that apply.)

A. dividends are only paid if there are sufficient after-tax profits.
B. she will have one vote for each preference share she holds.
C. yields are usually higher than those from loan stock.
D. dividends are usually paid twice a year.

A. dividends are only paid if there are sufficient after-tax profits.
C. yields are usually higher than those from loan stock.
D. dividends are usually paid twice a year.

Preference share dividends are usually paid at a fixed rate and half-yearly. Their payment has priority over ordinary shares, and they have no voting rights. Yields are usually higher than those from loan stock. - Chapter 2, Section A3A, Learning Outcome 1.2

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Caroline’s portfolio was valued at £20,000 at the start of the year and £24,000 at the end of the year. Caroline had received £1,000 of income during the year. When calculating the return, it is true to say that (Tick all that apply.)

A. the holding period return is 25%.
B. the money-weighted rate of return is useful to compare different portfolios.
C. the time-weighted rate of return breaks down returns into sub-periods.
D. when new funds are invested the money-weighted rate of return should be used.

A. the holding period return is 25%.
C. the time-weighted rate of return breaks down returns into sub-periods.
D. when new funds are invested the money-weighted rate of return should be used.

The holding period return is calculated as:
R = D + V1 - V0 / V0
R = holding period return
V1 = the value of the portfolio at the end of the period
V0 = the value of the portfolio at the beginning of the period
D = income received during the period

R = (£1,000 + £24,000 - £20,000) / £20,000 = 0.25 x 100 = 25%

The MWR is a modified version of the holding period return and is used when there is new money coming in as well as money going out. The TWR eliminates the distortions causing by the timing of new money and breaks down the returns into sub-periods. - Chapter 11, Section B1, Learning Outcome 9.1

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Calder PL has issued 4 types of preference shares; you would normally expect the shareholders to be ranked according to

A. the date the investor purchased the shares, with the earliest having higher priority.
B. the level of investment, with larger investors having higher priority.
C. their priority for payment of dividends and entitlement to capital on wind-up.
D. the number of preference shareholders compared to ordinary shareholders.

C. their priority for payment of dividends and entitlement to capital on wind-up.

Preference shares are generally ranked according to their priority for the payment of dividends and entitlement to capital on wind-up.

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Through the fact-finding process with Mr. Smith, it becomes clear his goals are unachievable. How should this be overcome?

A. Ask Mr. Smith to prioritise as soon as possible.
B. Scale back each goal proportionately.
C. Make him aware and help to identify needs, priorities and re-negotiate goals.
D. The role of prioritising lies with the adviser and he should do this as soon as possible.

C. Make him aware and help to identify needs, priorities and re-negotiate goals.

If an advisor establishes that a client’s goals are unachievable, they should explain this to the client and help them to better identify their needs and priorities so that their goals can be re-negotiated. - Chapter 9, Section A1E, Learning Outcome 7.1

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Which of the following is correct regarding the payment of Stamp Duty Land Tax (SDLT)? (Tick all that apply.)

A. The solicitor is responsible for completing the relevant forms on time.
B. It must be paid within 14 days of the date of the transaction.
C. If first-time buyer relief applies, SDLT is not payable on the first £425,000.
D. An additional 2% is charged on purchases of second residential properties over £40,000.

B. It must be paid within 14 days of the date of the transaction.
C. If first-time buyer relief applies, SDLT is not payable on the first £425,000.

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If the value of the pound fell, what effect (if any) would this normally have on the share price of major exporters?

A. They would fall.
B. They would be marked down.
C. There would be no effect.
D. They would rise.

D. They would rise.

If the value of the pound falls, the cost of exported UK goods is less; for major exporters this can result in an increased demand for their products; hence, share prices may rise. - Chapter 3, Section C3, Learning Outcome 2.3

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A company’s accounts show that dividends paid to ordinary shareholders over the last 12 months were £200,000 whilst dividends paid to preference shareholders were £100,000. Their profit after taxation was £1.25m. What is their dividend cover?

A. 6.25
B. 5.75
C. 5.25
D. 4.17

B. 5.75

Dividend cover is the number of times a company can pay its dividend from its current earnings. The calculation is: profit attributable to ordinary shareholders / dividends paid to ordinary shareholders.

Profit attributable to ordinary shareholders = Profit after tax and preference dividends (£1.25m - £100,000 = £1.150m). Dividend cover is therefore 5.75 times (£1.150m / £200,000). - Chapter 2, Section A5C, Learning Outcome 1.2

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If a company’s share price rose from 175p to 225p, the effect on its price earnings ratio is that it would

A increase.
B. decrease.
C. remain the same.
D. have no effect.

A. increase.

Price earnings ratio (P/E ratio) is the ratio of a company’s share price to its earnings per share i.e. how much an investor would need to invest for £1 of earnings. Therefore, if earnings stayed the same but the share price rose, the investor would need to invest more money to achieve the £1; hence, the answer is (a).

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Which of the following is used by investors as a benchmark index to track the performance of sustainable portfolios?

A. FTSE 100.
B. FTSE4Good.
C. FTSE All-Share.
D. FTSE AIM.

B. FTSE4Good.

The FTSE4Good Index Series is a set of indices used by investors to identify companies that demonstrate good ESG practices as well as benchmark performance.

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Which of the following should an investor mainly be aware of when considering direct investment in equities? (Tick all that apply.)

A. Share dividend volatility.
B. Liquidity risk.
C. Counterparty risk.
D. Ratings from credit rating agencies.

A. Share dividend volatility.
B. Liquidity risk.

Investing in shares carries risk; dividends may not always be paid and depending on the company, the shares may be hard to sell.

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Which of the following would have the effect of reducing short-term interest rates? A. Quantitative easing. B. Government plans to issue gilts to fund a deficit. C. Inflation expectations. D. Strong economic activity.

A. Quantitative easing. Quantitative easing is a government monetary policy where assets such as gilts are purchased to inject money into the economy with the aim of lowering short-term interest rates.

When considering the performance of equities against cash for different holding periods, the Barclays Equity Gilt Study 2016 specifically demonstrated that A. risk has no relation to time horizon. B. the longer equities can be held the better the chances of riding out downturns. C. disasters such as war have no long- or short-term impact on equity portfolios. D. cash has never outperformed equities.

B. the longer equities can be held the better the chances of riding out downturns.

According to portfolio theory, a rational investor will only ever hold a portfolio that lies somewhere on the A. efficient frontier. B. normal yield curve. C. inverted yield curve. D. optimised portfolio.

A. efficient frontier. The efficient frontier represents the set of portfolios that have the maximum rate of returns for a given level of risk. Each portfolio lying on the efficient frontier offers the highest expected return relative to all other portfolios of comparable risk. - Chapter 10

Each of the following is a limitation of the Capital Asset Pricing Model (CAPM), with the exception of which one? A. Finding a totally risk-free return is difficult. B. It is difficult to establish which index represents the true market portfolio. C. It is a multi-factor model that has yet to be proven effective. D. Betas are calculated from past experience and are not stable over time.

C. It is a multi-factor model that has yet to be proven effective. The CAPM is a single-factor model as it is only concerned with the investment’s sensitivity to the market as measured by its beta. The other options are limitations of the CAPM.

Domingo holds the following investments: Split capital investment trust UK life assurance bond Structured investment with kick-out In respect of his holdings only the A. structured investment will be subject to Capital Gains Tax. B. split capital investment trust has a hurdle rate. C. life assurance bond can issue different share classes. D. split capital investment trust is subject to counterparty risk.

B. split capital investment trust has a hurdle rate. Of those products, only the split capital investment trust would have a hurdle rate, which is basically the growth rate required to repay each class of share at the redemption date. Both this and the structured investment would be subject to CGT. Life assurance bonds do not issue share classes and it is structured investments which are subject to counterparty risk. - Chapter 7 G6B, Learning Outcome 6.2

Denise favours investing in tracker funds. The latest fund she has chosen purchases a sample of the shares that make up the index that it is tracking. This fund is therefore using A. screening. B. replication. C. contrarianism. D. stratification.

D. stratification. Where an index-tracking fund does not replicate the component shares of an index exactly, a sample may be used instead; this is known as stratification.

An investment manager with a mandate to diversify a portfolio to reduce volatility invests in securities A and B. This is most likely to indicate that securities A and B A. have been proven to perform positively in all conditions. B. have underperformed the benchmark and he is adopting a contrarian approach. C. have a low correlation coefficient. D. sit below the efficient frontier.

C. have a low correlation coefficient Assets with low correlation typically contribute the most to a reduction in portfolio volatility. - Chapter 10, Section B1,

What is the dominant theory of risk and portfolio management that was developed by Harry Markowitz? A. The efficient frontiers. B. Asset allocation. C. Stochastic modelling. D. Modern portfolio theory.

D. Modern portfolio theory.

Chris has recently taken advice from a financial adviser and consequently made various investments. On what basis and frequency should reviews of his portfolio take place? A. Six-monthly. B. Annually. C. As and when required. D. As agreed by him and his adviser within the client agreement.

D. As agreed by him and his adviser within the client agreement.

When investing in commercial bills, a fund manager should be aware that (Tick all that apply.) A they are long-term negotiable debt instruments issued by companies. B. the operation of them is similar to Treasury bills. C. they are a type of secured lending. D. companies with high credit ratings usually issue them. E. the yields are typically higher than the Treasury bill equivalent.

B. the operation of them is similar to Treasury bills. D. companies with high credit ratings usually issue them. E. the yields are typically higher than the Treasury bill equivalent.

Claire requires an annual payment of interest and capital of £1,500 at the end of each year for 10 years. The interest earned is 7.5%. Approximately how much needs to be invested now in order for her to achieve this? A. £21,220 B. £15,000 C. £10,296 D. £16,875

C. £10,296 To calculate how much Claire needs to invest to receive a series of payments plus interest, we need to use the annuity value formula A = P{ [1 - (1 + r)-n ] / r } where P is the regular payment. A= £1,500 x { [1 - 1.075-10] / 0.075 } = £10,296 (To calculate 1.075-10 use the xy button on your scientific calculator, where x = 1.075 and y = -10). - Chapter 5, Section A4A, Learning Outcome 4.1

A savings account has a quoted rate of interest of 8%; the interest is payable half yearly. What is the effective annual rate of interest? A. 8.25% B. 8.16% C. 8.22% D. 8.12%

B. 8.16% The effective annual rate of interest (EAR) = (1 + r / n)n - 1 EAR = (1 + 0.08 / 2)2 - 1 = 0.0816. Expressed as a percentage (x 100) = 8.16% - Chapter 5, Section A3A, Learning Outcome 4.1

Joseph is interested in investing in derivatives. As his financial adviser, you tell him that these are A. financial instruments used to provide market stability. B. specialist investments to provide increased speculative opportunities. C. financial contracts whose value is derived from the value of an underlying investment. D. instruments that allow investors exposure to underlying assets through direct ownership.

C. financial contracts whose value is derived from the value of an underlying investment. A derivative is not a product but a financial contract (also called a financial instrument) whose value is derived from the value of the underlying investments. - Chapter 8, Section H, Learning Outcome 6.2

Where a client has an Income Tax bill to pay in the next six months, they should be advised to hold the money to pay for this in A. long-term corporate bonds. B. a stocks and shares ISA. C. an Exchange-traded fund. D. a deposit account.

D. a deposit account.

Exon PLC has a beta of 1.2, the expected return of the market portfolio is 6% and the expected return on a Treasury bill is 3.3%. Using the Capital Asset Pricing Model, Exon’s expected return is A. 9.06% B. 8.52% C. 6.54% D. 9.24%

C. 6.54% The CAPM formula is: Expected Return on risky investment = Rate of return on a risk-free asset + Risk premium of the risky investment. Risk premium is calculated as Beta of investment x (expected return of the market portfolio – rate of return on a risk-free investment) Therefore, Exon’s expected return =3.3% + 1.2(6%-3.3%) = 6.54%. - Chapter 4, Section B2, Learning Outcome 3.1

Juliet has several buy-to-let properties. As her adviser you can tell her that liquidity risk is A. likely to occur if the government increases Income Tax on rental income. B. the risk of a tenant moving out and her being unable to find a new one. C. the potential of her being unable to sell at the true market value. D. mortgage rates rising and her tenants unable to afford rent increases.

C. the potential of her being unable to sell at the true market value. Liquidity risk is the risk that an asset cannot be traded quickly enough and may therefore have to be sold at a price below its fair value. Property can be particularly illiquid

The process where central banks draw money out of their economies by selling bonds previously acquired is known as A. financial regression. B. quantitative easing. C. disinflation. D. quantitative tightening.

D. quantitative tightening.

Ironstone has retained profits of £750,000 after paying £175,000 in dividends (each) to both their ordinary and preference shareholders. What is their dividend cover? A. 3.29 B. 4.29 C. 6.29 D. 5.29

D. 5.29 Dividend cover can be calculated using the formula: Profit attributable to ordinary shareholders/Dividends paid to ordinary shareholders. Ironstone’s profit attributable to ordinary shareholders = Total profit (£750,000 plus total dividends paid out £350,000) – dividends to preference shareholders (£175,000) = £925,000 Therefore, Ironstone’s dividend cover = £925,000/£175,000 = 5.29 - Chapter 2, Section A5C, Learning Outcome 1.2

Which of the following is true regarding a NS&I Guaranteed Income Bond? A. Interest is paid net of basic rate Income Tax. B. It is not possible to use the personal savings allowance against interest. C. Interest is paid gross but is taxable. D. It is possible to use the dividend allowance against returns.

C. Interest is paid gross but is taxable. The NS&I Guaranteed Income Bond pays interest gross, but the interest is taxable and can be set against the personal savings allowance (not the dividend allowance). - Chapter 1, Section B4E, Learning Outcome 1.1

Callum is using investment ratios to decide whether he should invest in the shares of a particular company. What are the main restrictions of him using the company’s net asset value (NAV)? (Tick all that apply.) A. NAV produces an accounting value, but in the event of liquidation, it is unlikely the assets would realise their balance sheet value. B. In the event of a takeover bid, the NAV provides no real compensation when considering the bid price being offered. C. NAV does not provide a useful guide for share price of companies with readily realisable assets. D. For companies valued on earnings potential, NAV does not take into account goodwill inherent in the business.

A. NAV produces an accounting value, but in the event of liquidation, it is unlikely the assets would realise their balance sheet value. D. For companies valued on earnings potential, NAV does not take into account goodwill inherent in the business.

If the annual rate of inflation falls from 0.3% to -0.2% this is an example of A. inflation. B. fiscal policy. C. deflation. D. disinflation.

C. deflation.

A client has invested £5,000 in each of the following equity-based ISA funds Investment Charge Return per annum A 5% initial charge 4% B 4% exit charge 4.9% C 4.5% exit charge 5.1% If at the end of two years, the three funds are encashed, which investment will be worth the most? A. Investment A. B. Investment B. C. Investment C. D. They are all worth the same.

B. Investment B. Investment into each fund is £5,000. Investment A has an initial charge of 5% - £4,750 is invested for 2 years at 4% - £4,750 x (1.04)2= £5,137.60 Investment B has an exit charge of 4% - £5,000 is invested for 2 years at 4.9% - £5,000 x (1.049)2= £5,502.00 - exit charge of 4% = £5,281.92 Investment C has an exit charge of 4.5% - £5,000 is invested for 2 years at 5.1% - £5,000 x (1.051)2= £5,523.00 - exit charge of 4.5% = £5,274.47 Investment B is therefore worth the most at the end of 2 years. - Chapter 5/8, Section A2/E11, Learning Outcome 6.2

Michael is considering investment in a FTSE 100 company for its potential for increasing dividends. He should be aware that dividend cover (Tick all that apply.) A. is a measure of how highly investors value the earnings of the company. B. gives an indication of the margin of safety the company has in maintaining dividends. C. measures how many times the dividend can be paid out of the current earnings. D. should only be used to compare companies working in different industries.

B. gives an indication of the margin of safety the company has in maintaining dividends. C. measures how many times the dividend can be paid out of the current earnings.

What would be considered the main limitations of using an index when comparing the performance of a portfolio? (Tick all that apply.) A. Investors would need to pay a subscription fee in order to be kept up to date with relevant indices. B. Market capitalisation means a few large companies can have a substantial effect on the market. C. Most indices only reflect changes in capital values. D. Investors are unable to access information about indices directly, information is only available to stockbrokers.

B. Market capitalisation means a few large companies can have a substantial effect on the market. C. Most indices only reflect changes in capital values.

Which of the following ISA transfers would result in the preservation of tax benefits? (Tick all that apply.) A. A transfer made in cash. B. An investment re-registered in the new ISA manager’s name. C. A transfer made to the investor who then re-invests with the new ISA manager. D. A transfer made as a combination of investments and cash.

A. A transfer made in cash. B. An investment re-registered in the new ISA manager’s name. D. A transfer made as a combination of investments and cash.

Manuel is investing in a structured product offering a return of 110% of the FTSE 100 or full return of capital if this is higher at redemption. Manuel should be made aware that all structured products A. are lower risk than other products. B. offer a high level of liquidity. C. involve counterparty risk. D. have an investment term of 12 months.

C. involve counterparty risk.

The style of investment management which is most likely to pay no attention to benchmarks is the A. top-down method. B. stochastic method. C. historic method. D. bottom-up method.

D. bottom-up method.

Maddie has just reached retirement. She is taking the pension commencement lump sum to buy a purchased life annuity (PLA). She is most likely to be doing this because A. she needs an income that is tax free as she has fully utilised her personal allowance. B. PLAs are taxed more favourably than a pension annuity which is taxed as earned income. C. she needs an income that can be varied to supplement her part time freelance work. D. PLAs are taxed in full as earned income, but she can use her personal savings allowance.

B. PLAs are taxed more favourably than a pension annuity which is taxed as earned income PLAs are split into a capital element which is tax free and an income element which is taxed as savings income. Pension annuities are taxed in full as earned income. Therefore, PLAs are taxed more favourably.

Kellie has recently invested in a collective investment fund. She has been informed by the manger that it is a retail UK UCITS fund. From this, we can conclude that it (Tick all that apply) A. has a minimum of 20 different holdings. B. may not borrow to invest on a permanent basis. C. may hold warrants without limit. D. may hold up to 25% in unlisted securities.

B. may not borrow to invest on a permanent basis. C. may hold warrants without limit. A retail UK UCITS fund may hold up to 10% of its value in up to four different securities, with no other permitted to make up more than 5%. The practical impact is that this means it is required to have at least 16 different holdings, though most have significantly more. Retail UK UCITS funds may not gear on a permanent basis but may hold warrants without limit. The fund may hold up to 10% in unapproved (or unlisted) securities. -

Pauline is the holder of a financial option. The choices available to her are that she can (Tick all that apply.) A. sell the option. B. exercise the option. C. buy the option. D. let the option expire worthless.

A. sell the option. B. exercise the option. D. let the option expire worthless.

Freda has a stocks and shares ISA, a general investment account and various open-ended investment company funds. If Freda were to hold all of her investments on a platform, the main advantage is that A. she will not have to declare any income via self-assessment. B. the platform may offer automatic portfolio rebalancing. C. she will receive free investment advice from the platform. D. she is guaranteed a minimum amount of investment return.

B. the platform may offer automatic portfolio rebalancing.

Your client, James, has a medium high attitude to risk and is planning for retirement in twenty years’ time. James is most likely to have a higher proportion of his portfolio in A. short-dated gilts. B. cash. C. equities. D. corporate bonds.

C. equities.

Where a client has a need for liquidity, what impact might this have on the level of risk that can be taken within their portfolio? A. It will have no immediate impact on the level of risk that can be taken. B. The level of risk that can be taken is generally increased. C. The level of risk that can be taken is generally reduced. D. It will have no immediate impact, but risk should be increased long term.

C. The level of risk that can be taken is generally reduced.

Anita’s financial adviser has recommended that she allocate more capital to equities to take advantage of a positive short-term outlook. This is an example of A. optimisation. B. strategic asset allocation. C. tactical asset allocation. D. overconfidence.

C. tactical asset allocation.

When making investment decisions, the main objectives of a client are concerned with A. return requirements and risk tolerance. B. benchmarks. C. understanding of risk. D. liability matching and maximising returns.

A. return requirements and risk tolerance.

When considering the characteristics of property investment, investors should be aware that (Tick all that apply.) A. it is an asset-backed investment. B. it can provide long-term protection against inflation. C. the prosperity of an area can boost prices. D. the returns from different types of property are always the same. E. property prices are unaffected by supply and demand.

A. it is an asset-backed investment. B. it can provide long-term protection against inflation. C. the prosperity of an area can boost prices.

A retail client is interested in investing in lump sum life assurance bonds. As their adviser, you can tell them that (Tick all that apply.) A. most are written as whole of life policies with no specific maturity date. B. life cover is usually just in excess of the value of the fund on death. C. any regular withdrawals are considered to be a return of capital. D. because they are lump sum investments they are classed as qualifying policies.

A. most are written as whole of life policies with no specific maturity date. B. life cover is usually just in excess of the value of the fund on death. C. any regular withdrawals are considered to be a return of capital.

Ahmed is an additional rate taxpayer. He is investing £20,000 into a new equity fund held within a stocks and shares ISA. If the fund pays an income of 3.8% in the first year Ahmed will receive A. £760.00 B. £703.00 C. £608.00 D. £470.44

A. £760.00 Ahmed will receive £20,000 x 3.8% = £760. As this is held in an ISA, there is no deduction for tax.

Paul is considering how to invest a recent windfall. He would like to focus on UK companies. Why has his adviser suggested he spreads his investment across different sectors within the UK market? A. Shares can fluctuate widely so this will reduce his expose to systematic risk. B. Spreading investment results in less broker commission and stamp duty. C. Correlation between sectors is always positive so this ensures his portfolio is diversified. D. Diversification across sectors of the UK market will reduce non-systematic risk.

D. Diversification across sectors of the UK market will reduce non-systematic risk.

The type of efficient market hypothesis where security prices reflect all the information that any investor can acquire is called A. weak form efficiency. B. semi-strong efficiency. C. strong form efficiency. D. semi-weak efficiency.

C. strong form efficiency.

Yvette has invested in an Exchange-traded note. She should be aware that A. they use derivatives to track the movement of an index. B. they are not affected by the credit rating of the issuer. C. she will receive interest payments twice a year. D. she will be able to trade the ETN at the daily settlement point.

A. they use derivatives to track the movement of an index.

Doris is investing in a purchased life annuity (PLA). In terms of the taxation of this, you can tell her that the capital element of a PLA is A. tax free because it is deemed to be a return of her original capital. B. tax free in order for it compete like for like with a pension annuity. C. taxable as savings but cannot be set off against her personal savings allowance. D. taxable as investment income which can be offset against her dividend allowance.

A. tax free because it is deemed to be a return of her original capital.

Which of the following can be used to benchmark the performance of sustainable portfolios as well as identify those companies that demonstrate strong environmental, social and governance (ESG) practices? A. FTSE4Good Index Series. B. MSCI WMA Private Investor Indices. C. FTSE AIM UK 50 Index. D. MSCI World Index.

A. FTSE4Good Index Series.

When considering the differences between Stamp Duty (SD) and Stamp Duty Reserve Tax (SDRT) it is true to say that: A. SD is applied on sales and SDRT only applies on purchases. B. SD is applied on transactions through CREST. C. SDRT is rounded to the next multiple of £5. D. SDRT is rounded to the nearest penny.

D. SDRT is rounded to the nearest penny. Stamp duty and SDRT are both a 0.5% government tax charge on the transfer of UK shares; however, there are some notable differences between the two. SDRT applies to electronic transactions through the CREST system and is rounded to the nearest penny, and stamp duty applies to transactions over £1,000 using a stock transfer form and is rounded to the nearest £5. - Chapter 2, Section A2A, Learning Outcome 1.1

An investment manager who uses arbitrage pricing theory hopes to A. magnify gains through borrowing. B. identify shares that offer long-term sustainable advantage. C. identify shares that are mispriced in the market. D. prove that average opinion is usually wrong.

C. identify shares that are mispriced in the market.

Nicky and Neale let out a room in their home. In terms of claiming rent-a-room relief, they should be aware that (Tick all that apply.) A. the room they let must be unfurnished. B. they can each claim £7,500 in relief. C. they must live in the property with the tenant. D. the relief does not apply to a self-contained unit.

C. they must live in the property with the tenant. D. the relief does not apply to a self-contained unit.

What does a country’s ‘real exchange rate’ measure? A. The price at which two currencies trade on the foreign exchange markets. B. The price of domestic goods relative to foreign prices taking into account the exchange rate. C. A country’s competitiveness. D. The effective exchange rates between countries’ currencies.

B. The price of domestic goods relative to foreign prices taking into account the exchange rate.

Which of the following can portfolio managers exercise in order to achieve desired results? (Tick all that apply.) A. Asset allocation B. Stock selection C. Changing benchmarks D. Risk

A. Asset allocation B. Stock selection D. Risk

The main source of income from a Sharia-compliant Ijarah fund is A. rent. B. interest. C. dividends. D. a coupon.

A. rent.

A client agreement would not usually set out the A. firm’s remuneration structure. B. frequency of reviews and valuations. C. qualifications of the adviser. D. duration of the agreement.

C. qualifications of the adviser.

How does the pragmatic approach to asset allocation differ from Modern Portfolio Theory? A. Modern portfolio theory uses diversification to reduce risk. B. Modern portfolio theory is concerned with the interaction of different asset classes. C. Pragmatists use forward-looking judgements of likely returns and volatility to determine portfolio weightings. D. Pragmatists use asset allocation as a defensive strategy to preserve capital.

C. Pragmatists use forward-looking judgements of likely returns and volatility to determine portfolio weightings.

Hannah has two investment portfolios as follows Portfolio Return Beta A 12% 1.5 B 9% 0.6 If the market rate of return is 4% and the risk-free rate is 1.5%, which of the following statements are correct? (Tick all that apply) A. The alpha for portfolio A is 6.75%. B. Portfolio B has performed better on a risk-adjusted basis. C. We cannot calculate the information ratio based on the above information. D. Both returns can be explained by the capital asset pricing model.

A. The alpha for portfolio A is 6.75%. C. We cannot calculate the information ratio based on the above information.

Jarvis has a bank account paying a nominal interest rate of 4% per annum. The interest is paid quarterly. He is therefore receiving an effective annual rate of A. 4.04% B. 4.05% C. 4.06% D. 4.07%

C. 4.06% The effective annual rate is calculated by dividing the nominal interest rate by the number of compounding periods and then using the compound interest formula. Therefore, 4% paid quarterly works out as (1 + 0.04 / 4)4 = 1.0406. Minus the one and multiply by 100 to give an effective rate of 4.06%.

Two investments are correlated as follows: Investment A Investment B Investment A 1.0 -0.3 Investment B -0.3 1.0 If investment A falls by 6%, investment B is likely to A. fall by 3%. B. fall by 1.8%. C. rise by 1.8%. D. rise by 3%.

C. rise by 1.8%. The correlation between the two investments is negative, expressed as -0.3; as investment A falls, investment B will rise. If investment A falls by 6% investment B will rise by 30% of this i.e. 1.8%. - C

Sidney has invested in four gilts, the details of which are below. Which gilt gives her the best running yield? Gilt Price Coupon 1 111.2 3.2% 2 115.4 3.8% 3 125.8 4.2% 4 122.6 4% A. Gilt 1 B. Gilt 2 C. Gilt 3 D. Gilt 4

C. Gilt 3 Correct. Gilt yields are calculated as coupon / price x 100. Gilt 1 = 2.88% (3.2 / 111.2 x 100) Gilt 2 = 3.29% (3.8 / 1 15.4 x 100) Gilt 3 = 3.34% (4.2 / 125.8 x 100) Gilt 4 = 3.26% (4 / 122.6 x 100) Gilt 3, therefore, gives the best running yield. - Chapter 1, Section C4A, Learning Outcome 1.2

When considering investment in money market funds, the most relevant risk to be aware of is A. event risk B. inflation risk C. non-systematic risk. D. diversification risk.

B. inflation risk

Harry is interested in money market funds. Which of the following types of risk should he be particularly aware of? A. Event risk. B. Interest rate risk. C. Systematic risk. D. Diversification risk.

B. Interest rate risk.

When using alpha to evaluate a portfolio a financial adviser should be aware that (Tick all that apply.) A. a positive alpha indicates performance is better than was predicted by its beta. B. alpha is part of the return which can’t be explained by overall market movements. C. alpha is measured using the standard deviation of returns. D. it is not possible to achieve a negative alpha.

A. a positive alpha indicates performance is better than was predicted by its beta. B. alpha is part of the return which can’t be explained by overall market movements.

How is risk measured within the efficient frontier model? A. Beta. B. Correlation C. Standard deviation. D. Alpha.

C. Standard deviation.

Which of the following is an example of the government trying to smooth the economic cycle through fiscal policy? A. Controlling the supply of money. B. Influencing levels of demand through taxation. C. Controlling interest rates. D. Influencing inflation expectations.

B. Influencing levels of demand through taxation.

If a bond’s redemption yield is higher than its interest yield, what does this indicate? A. The bond has just made an interest payment. B. There will be a capital gain if held till maturity. C. The issuer has a strong credit rating. D. The bond’s proceeds will be tax-free.

B. There will be a capital gain if held till maturity.

Providers of investment trust savings schemes must provide investors with a A. product information document (PID). B. key information document (KID). C. packaged retail information document (PRID). D. key facts document (KFD).

B. key information document (KID).

Which of the following means may be used by the UK Government to control inflation? A. Increasing interest rates. B. Quantitative easing. C. Increasing taxation. D. Increasing currency exchange rates.

C. Increasing taxation. Increasing tax rates will generally help control inflation as there is less money available to be spent. The UK Government no longer controls interest rates, which are set by the Bank of England’s Monetary Policy Committee. It also does not set exchange rates, which are determined by market forces. Quantitative easing stimulates spending and would therefore not be an effective means of controlling inflation.

Steve has a cautious risk profile. His main goal is to achieve an investment return that is equal to or just above the rate of inflation. Steve’s return objective is most likely to be A. capital preservation. B. capital appreciation. C. income. D. total return.

A. capital preservation.

Limetree has earnings per share of 18.24p and a dividend per share of 7.52p. What is their dividend cover? A. 2.43 times. B. 2.43%. C. 4.12 times. D. 4.12%.

A. 2.43 times. The dividend cover is the number of times a company is capable of paying dividends to shareholders from the current earnings. One way of calculating dividend cover is: Earnings per share/Dividend per share. Therefore, Limetree’s dividend cover = 18.24 / 7.52 = 2.43. -

Freddie has invested in an Exchange-traded fund (ETF) which holds shares in all of the index that it is tracking. We can say that Freddie’s ETF uses A. screening. B. full replication. C. optimisation. D. stratification.

B. full replication.

The FTSE 100 is an arithmetically weighted index based on A. size of the company. B. share price movements. C. number of shares of company. D. market capitalisation of each company.

D. market capitalisation of each company.

Ikram, a wealthy investor, has some short-term funds available and is considering purchasing an issue of Treasury bills. He should be aware that A. these are not sold to members of the general public. B. he will need to purchase a minimum value of £1 million. C. he can purchase bills with terms of up to 180 days. D. he must go through a Treasury Bill Primary Participant.

D. he must go through a Treasury Bill Primary Participant. Treasury bills are short-term money market instruments issued by the UK government with terms of between 1 and 364 days. The minimum purchase in any one tranche is £500,000. Private individuals may purchase holdings but must do so via a Treasury Bill Primary Participant. -

Why is credit risk an important factor when considering investment in structured products? A. The credit worthiness of the issuer and any counterparties might affect the ability to repay at maturity. B. The client needs to consider the costs and fees associated with buying, holding and selling the structured product. C. It is essential to determine the extent to which the investor will capture any upward movements in the market. D. The lack of an established secondary market means investors are unable to trade the products.

A. The credit worthiness of the issuer and any counterparties might affect the ability to repay at maturity.

Jenna’s portfolio was valued at £30,000 at the start of the year. £3,000 was withdrawn after six months. At the end of the year, the portfolio was valued at £34,000. Jenna’s adviser is calculating the rate of return and can tell her that (Tick all that apply.) A. he is is measuring the performance of the portfolio. B. he is evaluating the performance of the portfolio. C. the money-weighted rate of return is 3.17%. D. the money-weighted rate of return is 24.56%.

A. he is is measuring the performance of the portfolio. D. the money-weighted rate of return is 24.56%. Jenna’s adviser is measuring the performance of the portfolio by calculating the money-weighted rate of return (MWR). MWR is calculated as follows: MWR = (D +V1 – V0 - C) / [V0 + (C x n/12)] where D = income taken during the period, V1 = the value of the portfolio at the end of the period, V0 = the value of the portfolio at the beginning of the period, C = new money added during the period (this is a negative amount for withdrawals), n = number of months remaining in the year. Therefore, MWR = (0 + £34,000 - £30,000 - (-£3,000)/ [£30,000 + (-£3,000 x 6/12)] = £7,000/£28,500 = 24.56%. Note: D = 0 as we are treating the £3,000 withdrawal as a negative cash flow. Hence, the answer is (a) and (d). If the adviser was evaluating the performance of the portfolio, they would be comparing the performance of the portfolio to the given benchmark and assessing how they achieved the return e.g. added risk or asset strategy etc

An investment trust can implement financial gearing by (Tick all that apply.) A. issuing debentures. B. exercising warrants. C. issuing unsecured loan stock. D. arranging a bank loan in a foreign currency.

A. issuing debentures. C. issuing unsecured loan stock. D. arranging a bank loan in a foreign currency.

When investing in a property authorised investment fund, investors should be aware that A. dividends will be paid net of 20% Income Tax. B. property-related income is exempt from taxation within the fund. C. interest income is paid net of 20% Income Tax. D. all income is treated as property income and paid net of 20% Income Tax.

B. property-related income is exempt from taxation within the fund.

Corrine is considering investing in an exchange traded fund (ETF) and Carl is considering investing in an exchange traded note (ETN). A difference between the two investments is that A. ETNs have a maturity date. B. ETFs are traded on major stock markets. C. ETNs performance tracks the movement of an index. D. ETFs give access to specialist market niches.

A. ETNs have a maturity date.

Henry has adjusted net income of £102,000. He has recently encashed an investment bond and made a substantial gain. To calculate the personal allowance to be used within the top slicing calculation, the chargeable gain is A. top-sliced before being added to Henry’s income. B. added to Henry’s income without being top sliced. C. not included when tapering personal allowance. D. only included if the top-sliced gain is in excess of £2,000.

A. top-sliced before being added to Henry’s income.