October 2024 Flashcards
Identify four benefits of investing in a GIA compared to an onshore bond (4 marks)
• Wider range of investments.
• No internal/underlying taxation.
• Gains assessed to CGT/CGT rate lower than IT rate.
• CGT annual exemption.
• CGT liability extinguished on death.
• Auto ISA available.
• Simple to understand.
Describe briefly what is measured by Macaulay duration. (6 marks)
• Weighted;
• average term;
• in years;
• for purchase price to be paid back;
• by cash flows/coupons;
• and redemption value.
Explain briefly how Macaulay duration would be used within a fixed interest
portfolio. (2 marks)
• Portfolio immunisation/liability matching.
• Predict returns.
• Hedge out interest rate risk.
Explain briefly how modified duration would be used within a fixed interest
portfolio. (2 marks)
• Reduce/measure interest rate risk/sensitivity.
• Reduce/manage duration risk.
Identify five economic or market factors that would likely cause an increase in the
duration of a fixed interest fund. (5 marks)
• Peak interest rates
• Peak inflation
• Bond yields high
• Attractive entry point
• Reduction in new issuance.
• Central bank action.
Describe the main characteristics of growth and value investment strategies. (10 marks)
Value:
• Aims to identify undervalued stocks
• Considers out-of-favour stocks
• Places greater emphasis on dividends/high dividend coverage.
• Looks at fundamentals of company/tends to focus on low P/E or PEG.
• Assumes market is not efficient.
• Assumes mispricing will correct over time
• Tends to be longer term.
Growth
• Aims to identify stocks with potential for above average share price growth.
• Higher growth rate in EPS
• Tends to ignore valuation/fundamental analysis
• Tends to focus on high P/E or PEG
• Places lower reliance on dividends/low dividend coverage.
Explain the objective of regression analysis and identify two ways in which it can be applied in investment planning. (4 marks)
• Predict;
• one variable;
• based upon information;
• from another variable.
• Calculate historical data
• Calculate correlation
• Calculate impact of economic changes.
• Analyse portfolio performance to identify investment style.
Explain what is measured by the r-squared value in respect of the fund. (4 marks)
• The percentage;
• changes in the fund;
• that can be explained by movement;
• in the benchmark
• Identifies suitability of a benchmark.
• Can identify beta and alpha derived from fund’s composition.
State three drawbacks of using the MWR. (3 marks)
• Influenced by cashflows/timing of new money;
• that are outside of manager’s control.
• Not suitable for comparing portfolios.
• Does not show fund manager’s skill.
Identify four main risks of investing in structured products and state one example of each type of risk. (8 marks)
• Accessibility
• Can not sell
• Counterparty
• Derivatives provider may default.
• Index
• May not provide expected returns
• Reinvestment
• May have to reinvest on worse terms
• Capital
• Return may be less than amount invested.
• Income
• No income/participation in dividends.
Outline the main features of NS&I Income Bonds. (7 marks)
• Paid gross;
• monthly;
• but taxed as savings income/PSA available.
• Minimum investment £500.
• Maximum investment £1,000,000.
• Can invest jointly/maximum amount is per person.
• Instant access/penalty free.
• Interest must be paid out/cannot accumulate.
• Interest rate is variable.
State three reasons why NS&I Income Bonds may be more suitable than NS&I
Green Savings Bonds (3 marks)
• Income Bond maximum investment higher
• Income Bond interest rate higher
• Income Bond interest is paid out
• Income Bond instant access
• Income bond interest taxed in year of receipt/Green Savings Bond interest all
taxed in final tax year.
• Income Bond interest rate variable/Green Savings Bond rate fixed.
State four benefits of using the CAPM. (4 marks)
• Model is easy to use/calculate.
• Robust/proven.
• Accounts for systematic risk/beta.
• Assumes non-systematic risk has been removed.
• Output is the expected return/can be used to compare funds.
Outline three main differences between a fund of funds (FoF) service and a
managed portfolio service (MPS). (3 marks)
• FoF is one fund/MPS is a collection of funds.
• FoF trades within the fund/MPS trades as the investor.
• FoF does not create CGT on fund switches/MPS creates CGT on fund switches.
• FoF investor has control/MPS investor has no control over CGT.
Identify five provider-related factors that an adviser would take into
consideration when evaluating a DIM service. (5 marks)
• Past performance/track record.
• Investment objective/style.
• Manager expertise/reputation.
• Cost.
• Minimum investment.
• Size/financial strength.
• Use of high risk/illiquid assets.
• Choice of custodian.
Identify four main risks of using a DIM service compared to investing in a FoF. (4 marks)
• Overtrading/higher costs.
• Service may incur tax liability.
• Overlap/duplication with non-DIM portfolio/concentration risk.
• DIM acts outside its mandate/deviation from benchmark/style drift.
• Regulatory issues/basis of contract/DIM can make decisions without client’s
permission.
Identify and explain briefly the four main investor return objectives. (8 marks)
• Capital Preservation
• Minimise loss;
• after inflation.
• Capital Appreciation
• through capital gains.
• Current Income
• Focus on investments that generate interest/dividend.
• Total Return
• through combination of income and capital gains.
State five main client-related factors that impact investment returns and a
portfolio’s capability to achieve its objectives. (5 marks)
• Time horizon/expected Investment term.
• Requirement for income/capital/emergency fund.
• Tax Position.
• Availability of allowances and reliefs.
• AtR/CfL.
• Investor psychology/behavioural biases.
State the three main types of benchmark and describe briefly the purpose of each
type. (3 marks)
• Constraint
• Used to limit the construction of a portfolio.
• Target
• Used to match/exceed performance.
• Comparator
• Used to compare performance/risk.
Outline briefly the main differences between current and non-current assets on a company’s balance sheet. (3 marks)
Current
• Stock/inventory.
• Cash/bank deposits/short term investments.
• Trade receivables/debtors.
Non-Current
• Tangible.
• Intangible.
• Investments.
Identify three differences in the main listing criteria between AIM and the UK
main market. (3 marks)
• AIM no minimum market capitalisation/Main market £30 million.
• AIM no minimum earnings/Main market 3 years revenue record.
• AIM no minimum free float/Main market minimum 10%.
• AIM no admission document/prospectus (unless shares issued to public)/Main
market prospectus.
• AIM nominated adviser/Main market listing sponsor.
Describe briefly how a market capitalisation-weighted index is constructed. (4 marks)
• Sum of;
• share price multiplied by;
• shares outstanding;
• of all constituents/companies in the index;
• adjusted for free float.
State two asset types that are permissible investments within an IFISA. (2 marks)
• Cash/deposit.
• Peer to peer loans.
• Crowdfunding debentures/debt/bonds issued by charities.
• Alternative finance arrangements/Sharia accounts.
Identify three main risks specific to investing in an IFISA. (3 marks)
• Credit/default.
• Institutional/provider.
• Accessibility.
• Event.
