Opportunity set - What can we invest in?

Question 1

what is an asset class

Answer 1

a group of financial instruments which have similar financial characteristics and behave in a similar way in the marketplace

Question 2

what are the traditional asset classes

Answer 2

cash or cash equivalents

stocks or equities

bonds or other fixed income investments

Question 3

what are cash products also known as

Answer 3

money market instruments

Question 4

examples of money market instruments

Answer 4

treasury bills
repurchase agreements
commercial paper, commercial deposits

Question 5

what is the maturity date on the money market

Answer 5

less than 1 year

Question 6

how does all debt end up being a money market instrument at some point

Answer 6

when maturity date reaches less than 1 year

Question 7

why is equity always a capital market product and never cash

Answer 7

it will never expire
in theory a business can run forever

Question 8

what are repurchase agreements

Answer 8

short term lending between banks

Question 9

what are treasury bills

Answer 9

short term US Government bonds

Question 10

what are commerical paper and commercial deposit

Answer 10

short term borrowing that banks use

Question 11

why are cash products low risk

Answer 11

liquid
short term so predictable

Question 12

which type of bonds are the most liquid

Answer 12

government bonds

Question 13

which has more credit risk:
- government bonds
- corporate and bank bonds

Answer 13

corporate and bank

Question 14

example of an asset backed bond

Answer 14

mortgage

Question 15

what are green bonds / sustainable bonds

Answer 15

proceeds must e used for something environmental or social

the coupon of the bond is linked to KPI, steps up if the company fails to meet them

Question 16

benefits of green bonds

Answer 16

linking progress on sustainable development goals to the cost of borrowing

keeps companies accountable for their actions

Question 17

what is a bond with an embedded option

Answer 17

the person who has borrowed can pay back early or the lender is able to ask for the borrower to pay back early

Question 18

what are supernational government bonds

Answer 18

not tied to any one government

Question 19

what are municipal government bonds

Answer 19

local government borrowing

Question 20

what are sovereign government bonds

Answer 20

national borrowing

Question 21

what are the 3 types of government bonds

Answer 21

supranational
sovereigns
municipal

Question 22

what are the two types of corporate bonsd

Answer 22

secured
unsecured

Question 23

what bond ratings are of investment grade

Answer 23

BBB- and above

Question 24

what is a floating rate bond

Answer 24

where the coupon is tied to a benchmark rate

Question 25

what does residual claim mean

Answer 25

after the wind up of a business, the equity holder will not get a penny until all of the other debts of the business are paid off

Question 26

what is a hybrid security

Answer 26

preference share

Question 27

examples of companies which are still private

Answer 27

lidl aldi ikea dunnes stores

Question 28

what are angel or seed investors

Answer 28

invest in business in a very early stage - just as the idea is forming, with few to no customers

Question 29

what is venture capital

Answer 29

investment at the early stage of growth venture capitalists put small amounts in lots of companies hoping that some of them succeed

Question 30

what are private equity firms

Answer 30

invest when the company has a stable cash flow these firms advise management and at exit time tend to sell on to other private investors

Question 31

how to judge investments in terms of risk

Answer 31

1. equity is the last in the queue - most risky 2. creditworthiness 3. maturity - long is more risky 4. convertibility - how liquid and can you trade it, which markets can you trade it in (eg limited by countries or currencies?)

Question 32

examples of alternative investments

Answer 32

derivates venture capital private equity currencies real assets eg real estate crypto currency hedge funds

Question 33

what is a future or a forward in the derivate market

Answer 33

delayed purchase of an asset with an agreed price now

Question 34

what is an option in the derivate market

Answer 34

like an insurance contract, you may or may not use it the buyer has the right to buy or sell and asset in the future at a certain price

Question 35

examples of how ryanair use deriviates

Answer 35

they don't know now what they will pay for oil in 3 months time they don't buy oil and store it as their planes need to top up everywhere and the storage would be expensive

Question 36

how are derivates like bets

Answer 36

they allow transfer of risk you can make exposure to anything so long as someone is willing to take up the other side of the bet eg. amount of rainfall in a year

Question 37

reasons not to invest as an individual and to instead use investment funds

Answer 37

-> professionals may be able to make better returns -> economies of scale eg lower transaction costs (buying in bulk etc) -> increase asser diversification -> more companies can be analysed

Question 38

what does EFT stand for

Answer 38

Exchange Traded Fund

Question 39

Types of investment funds

Answer 39

Investment funds investing in a mixture of stocks and bonds EFTs - bought and sold like shares Hedge Funds

Question 40

Are hedge funds available to retail investors

Answer 40

no only to large, sophisticated investors

Question 41

what types of assets do hedge funds invest in

Answer 41

more risky assets

Question 42

are hedge funds regulated

Answer 42

no

Question 43

are EFTs regulated

Answer 43

yes

Question 44

what is the bid price

Answer 44

the price a dealer is willing to buy at

Question 45

what is the ask priec

Answer 45

the price the dealer is willing to sell at

Question 46

what is the bid ask spread

Answer 46

the difference between a dealer's bid and ask price

Question 47

what is a market order

Answer 47

a buy or sell order that is to be executed immediately

Question 48

what is a price contingent order

Answer 48

traders specify buying or selling price

Question 49

what does buying on margin mean

Answer 49

the investor borrows part of the purchase price on stock

Question 50

what is the maintenance margin

Answer 50

minimum equity that must be kept in the margin account

Question 51

what is the initial margin requirement

Answer 51

50%

Question 52

how do short sales work

Answer 52

investor borrow stock from a broker and sells it when the price is lower buy them back and return to broker keep the profit

Question 53

why might private trading outperform public according to The Economist, Privacy and its limits, Jan 20th 2020

Answer 53

Private capital reduces agency costs (not constantly monitored by the public but instead held closely by a few hands)

Question 54

what do private equity investors investors eg angel and venture add to the firms

Answer 54

- raise efficiency - raise growth - raise profitability - if its a family owned or smaller business, the private firm has better management habits and skills - they back innovation, speedier product launces