Past Papers Flashcards
What are the components of the UKs current account?
Goods and Services
Plus investment income
Transfer payments
What are the components of the UKs Capital account?
Foreign investments
Foreign loans
Foreign currency
What’s the main difference between unfettered fund of funds and a manager of managers fund
FoF is multiple funds/MoM is one fund
FoF additional charges
FoF no control over mandate
FoF less transparent
What conditions must a VCT satisfy to meet HMRC requirements?
Listed on stock exchange
Income derived wholly from shares
At least 70% in qualifying unlisted trading companies
At least 10% in any one company must be in ordinary shares
Have fewer than 250 full time employees
Gross assets no more than £15m before investment and £16m after
Explain HMRC rules that a company must meet to qualify for EIS funding
Gross assets no more than £15m prior or £16m after
Raising no more than £5m within each tax year
Permanently based in UK
Carry out genuine trade
Fewer than 250 full time employees
State four main types of index replication strategy and describe briefly how each strategy works
Full Replication - buys all stocks within the index in correct weighting
Stratified Sampling - buys a sample of stocks within index
Optimisation - buys computerised model of index
Synthetic - uses derivatives
State 4 limitations of using Alpha to measure a funds performance
Doesn’t explain reason for outperformance
Assumes the CAPM/market/benchmark etc are correct and suitable
Assumes Beta is correct measure of risk
Ignores costs/charges
Explain contribution and withdrawal rules for Lifetime ISA
Part of overall ISA allowance
Must be over 18 and under 40
can contribute only until age 50
Withdrawal penalty of 25% unless it is used to buy first home of £450k max or
age over 60 or
terminally ill
List main difference in structure of OEIC vs Investment Trust
OEIC Unlimited shares / IT fixed number of shares
OEIC redeems shares linked to NAV/ IT shares sold independent of NAV
OEIC must appoint an ACD and assets are held by depositary
IT is a listed company with a board of directors
OEIC can borrow up to 10%/ IT can have unlimited borrowing
List main differences in pricing of OEIC vs Investment Trust
OEIC Daily pricing / IT real time pricing
OEIC based on NAV / IT based on supply and demand
OEIC single priced / IT dual pricing/ bid/offer spread
OEIC may apply dilution levy
IT can trade at a discount or premium of NAV
What is the objective of Stochastic modeling ?
Predict the likely range of returns and volatility under different scenarios
name 4 drawbacks of using Stochastic modelling
Assumptions unrealistic
ignores sequencing risk
over confidence
too complex
doesnt factor in client circumstance
What is measured by ROE?
Measures the percentage return the company is achieving on the funds provided by the shareholders
State 3 main ways a stock market index is weighted
Value
Price
Equal
What is meant by ‘free float’ and how does it affect a companies weighting in FTSE UK induces
Proportion of shares traded on the market
If less than minimum free float they will have weighting reduced
List 3 main metrics used to measure risk adjusted returns of an actively managed fund and outline 2 purposes of each metric
ALPHA
Stock picking
Excess return not explained by beta
SHARPE
Excess return for every unit of risk
Excess return over standard deviation
INFORMATION RATIO
Consistency of manager
Excess return over benchmark
What is meant by the term Capacity for loss
The ability to absorb any negative investment event without an adverse effect on standard of living
What are the main features of a Managed Portfolio Service
Collective based
Low min investment
Asset allocation determined by investment committee
Portfolio changes can result in CGT liability
Range of risk adjusted portfolios
Limited choice/ not bespoke to client
Low cost
State 4 main assumptions used in portfolio optimization
Risk
Historical data
Forecasts
Costs
What are fettered and unfettered funds
Fettered is when a fund only invests in the in-house fund range - cheaper
Unfettered is where funds from other managers can be used as well - wider fund choice
What is meant by GDP and what does it measure
Total of all goods and services of an economy over a year. Measures the size and growth of economy
Explain from investment perspective the consequences of globalisation.
Increased connectivity of economies
Increased correlation of equity markets
Reduced diversification of equities
Increased volatility risk
Greater sensitivity to political events
Increased competition for investment capital
Friendly Society policies
Tax efficient savings
No income tax or CGT
£270 annual limit or if paid monthly £25pm so £300 pa
Funds grow tax free
High degree of security
Return tax free after 7.5 years
What are the share dealing costs?
Stamp Duty 0.5% rounded up to £5 on paper or to the nearest penny online (crest)
Commission - charged by broker
PMT Levy - £1.50 flat fee on purchases and sales over £10k
What is measured by Macaulay Duration
Weighted average term in years for purchase price to be paid back by coupons and redemption value
Outline 3 benefits of using structured products
Income may be higher than available from cash deposits
Level of income fixed for the term allowing budgeting
Covered by FSCS
Can be used in pension or ISA
Outline 5 drawbacks of structured products
Illiquid
Counterparty risk
Provider insolvency
Index may fall below protection level, could be capital loss
Income could cease if index fails to perform
How would Macaulay Duration be used within fixed interest portfolio
Used to predict returns and hedge out interest rate risk
How is modified duration used within a fixed interest portfolio
Reduce interest rate risk and duration risk
What 5 economic or market factors would cause an increase in the duration of a fixed interest fund
Interest rates expected to fall
Inflation expected to fall
Bond yields high
Attractive entry point
Reduction in nre issuance
Central back action
Outline main features of NS&I Income Bonds
Paid gross monthly
Taxed as savings income so PSA available
Min £500 Mac £1m per person
Instant access
Interest must be paid out
Interest rate is variable
Identify 3 differences in main listing criteria between AIM and UK main market
AIM no min market capitalisation / MAIN £30m
AIM no min earnings / MAIN 3 years revenue record
AIM no min free float / MAIN min 10%
AIM prospectus / MAIN prospectus
How is a market capitalisation weighted index constructed
Sum of share price multiplied by shares outstanding of all companies in that index, adjusted for free float
State 3 main types of benchmark and what is the purpose
Constraint - used to limit the construction of a portfolio
Target - used to match portfolio
Comparator - used to compare performance
What is measured by standard deviation
Volatility through variation in actual return against mean
What are the 8 CAPM assumptions?
I - Investors are rational and risk adverse
I - investors make decisions based on risk and reward alone
I - investors have the same holding period
I - information is free and available to all
M - market has many buyers and sellers
U - unlimited funds can be borrowed/lent by all investors at the risk free rate
N - no one investor can affect the share price
T - there are no taxes, costs or restrictions on selling
What are the main functions of the ACD
Compliance and regulatory reporting
Valuations
Appoint manager
Buy/sell shares
Maintain shareholder register
Maintain liquidity
Prepare accounts
What are the main functions of a depositary for an OEIC?
Act as custodian
Safeguard assets
Pay income distributions
Deal with wind up
Monitor ACD
