Phase 3

Question 1

Smart beta and Emerging Markets positives and negatives?

Answer 1

+ Usually EM’s are less efficient and so can offer mis priced securities to take advantage of.

• Hihgly concentrated indicies with 25 companies taking up top 25% on FTSE EM index compared to 15% on the FTSE world.
• Less sector diversification and so needs active management to maintain diversification.
• Many countries dollarized so turbulence can effect many markets in ME’s
• remember explain what smart beta is ie no market cap weights but use a subset fundamentals.
• EM can be expensive. Alternative indexation can offer value for money.
• liquidity can be a concern for smart beta funds and they often base them on historic correlations.

Question 2

What formula shows the most efficient type of portfolio?

Answer 2

Sharpe - Rp-Rf / SD

Question 3

If a portfolio increased 97.5% over 12 years what is the formula?

Answer 3

Expand brackets 100(1+r)^12=197.5

12th root of 1.975 minus 1

Question 4

What is R^2?

Answer 4

value of the square of the correlation coefficient. often referred to as coefficient of determination and how well stocks are correlated.

Question 5

what is the appraisal ratio?

Answer 5

Appraising managers against the benchmark or a passive fund. portfolio alpha / portfolio unsystematic risk
This can be compared to the Sharpe ratio (return divided by total risk). If the appraisal ratio exceeds the Sharpe ratio then this is indicative of superior performance in that the extra return has more than compensated for the additional risk.

Question 6

what is the information ratio?

Answer 6

Takes the average alpha divided by standard deviation of alpha. This allows investors to assess the consistency of fund managers.
IR = (fund rtn Rp - target return Rt) / tracking error

Question 7

What is the time weighted rate of return?

Answer 7

(Ve1/Vs1) x (Ve2/Vs2) -1

Question 8

What is the shareholders rights directive?

Answer 8

Empowering private client and wealth management sectors encouraging everyone to join together to get their voice heard. Highlights remuneration and related party transactions and ensures transmission of info to shareholders.

Question 9

What is value Investing?

Answer 9

Inexpensive undervalue firms with efficient processes.
Generally less risk and low beta.
High Price to book ratios.
Long term strategy

Question 10

What is growth investing?

Answer 10

Rapid growth prospect stocks often early stage copanies.
Small/Mid caps higher proportion.
Lower Price to Book ratio.
long term strategy

Question 11

What is momentum investing?

Answer 11

Stocks with high returns for last 3-12 months.
Looking to exploit behavioral shortcomings as well as over/undereacting.
Short term strategy.

Question 12

What is corporate governance?

Answer 12

Uses the UK corporate governance code 2012 was set to create a set of principles for ‘companies’ not investors.
-board leadership and effectiveness
- remuneration
- accountability
-shareholder relations
Ethical behaviour - paying staff fairly
Transparency - all figure should be true without ‘creative accounting or exaggeration.

Question 13

What are the positives and negatives of Emerging Markets?

Answer 13

• usually less efficient on so more likely to spot mis-priced securities
• EM indicies such as FTSE EM top 25 companies are 25% of index compared with 14% on the FTSE world.
• less sector diversification
• Countires across EM are highly correlated due to being dollarized so terbulant times can effect all markets.

Question 14

What is the unlevered beta ratio?

Answer 14

BU = BL / (1 + debt to equity)

Question 15

What is the money weighted rate of return?

T0 - 97.5m T-6 5m T-12 104.5m

Answer 15

97.5 (1+ r) + 5 (1 + r)^0.5

usually a multiple choice answer so trial and error.

Question 16

How are OEIC taxed?

Answer 16

Dividend income is exempt and so is CGT (however they come with 10% tax credit for BRT payers).
The fund itself pays 20% corporation tax.

Question 17

What is the REIT tax position?

Answer 17

Underviersified high risk.Must distribute 90% of profits to be corporation tax exempt. 75% of total profits from property letting.

Question 18

What is the VCT tax position?

Answer 18

Diversified higher risk quoted company invests in a selection of companies which are unquoted.
Dividends are paid at BRT 10%
exempt from capital gains instantly but no loss relief.
30% on max investment of £1m if held for 5 years.

Question 19

What is the EIS tax position?

Answer 19

An undiversified direct investment.
30% relief on up to £1m investment if held for 3 years.
100% relief on gains and and loss relief
Dividends taxed at income rate
EIS’S QUALIFY for business property relief if held for 2 years so no inheritance tax would be payable.

Question 20

How are offshore funds taxed?

Answer 20

Funds offshore do not pay tax to the UK. Holdings within the fund are subject to local tax rules and so low tax jurisdictions make good locations to set up.
If individuals withdraw from the funds they are taxable at their local income tax rate dependant on if reporting on non reporting.

Question 21

How is a non reporting fund taxed?

Answer 21

No tax ont he fund unless cash is remitted back to the uk.

Gains remitted back to the UK are taxed as INCOME not CGT!

Question 22

How are UK residents taxed?

Answer 22

Write down ‘Statutory residence test!!!’
If overseas then automatically not a resident
183 days in the UK a year you ARE resident.
Domicile has impact on overseas income.

Question 23

What is the GRY and YTM calcuation

Answer 23

7% coupon 8 year baught at £95
7 / 95 x 100 = 7.4%
(£5/8)/ £95 = 0.07%
0.07 + 7.4 = 8.1%

Question 24

Share Price (Ex Div) forumla?

Answer 24

SP Ex div = D1 / r - g
Where r is the expected return NOT the required return.
and D1 is the dividend payment.

Question 25

What is the nominal /real and inflation return equation?

Answer 25

1+r = (1+n) / (1+i) -1

Question 26

What is availability?

What is anchoring?

Answer 26

“Rationally bounded”
availability - A human trait where by you overweigh more memorable facts as being the main reason. (saying how come more people die of heart failure as its what came tomind first)
anchoring -when faced with a value or figure you tend to make guestimations close to this point (what will the ftse 100 be in one year? Probably an inflation adjusted bit more than it is now)

Question 27

What is the spot/base fx rate equation?

Answer 27

Forward rate = Spot x (1+ interest rate overseas) / (1+interest rate domestic)
USD/JPY 1/100 becomes
x = 100 * 1+ 0.00 / 1.005

Question 28

What is Gamblers Fallacy?

What is overconfidence?

Answer 28

Gablmers fallacy - leaning towards an averse bias due to a consistent set of results leaning what you feel is too far one way (if you flip a coin head tens times then the next toss is more likely to be a tail)
Overconfidence -leads to investors overestimating their predictive ability and draw far too strong inferences from small amounts of data.

Question 29

What is mental accounting?

What is noise trading?

Answer 29

Mental accounting - seperating current wealth from future wealth in sseperate accounts which can affect behaviour or attitude to risk
Noise trading - Ignoring fundamental data and following investment ‘trends’

Question 30

Assumptions of the EMH? The three forms?

Answer 30

Strong form (insider) - semi strong form - weak form(technical analysis pointless)
Past Weak
Past, Public Semi strong
Past, Public, Private Strong
- A large number of profit maximising participants who analyse and value securities independently of one another
- Participants analyse and value securities independently of each other
- New information comes to the market randomly (unpredictable). New information must, by definition, be unpredictable and random otherwise it would not be new information

Question 31

Warren who and Anthony who?

Answer 31

Warren Buffet and Anthony Bolton achieved alpha in excess of 20% for 6 out of 7 five year periods between 1965 and 2000.

Question 32

Explain a foundation phase financial capital and human capital thought process?

Answer 32

At the foundation stage financial capital is low (low wealth) and human capital is high (increasingly higher earnings) In retirement it flips.

Question 33

What are the 5 main assumptions of CAPM?

Answer 33

• Investors are rational and risk averse
• No transaction costs commissions taxes etc.
• Investors can lend/borrow at the risk free rate.
• Investors prefer higher returns for lower risk.
• Investors prefer a lower level of volatility for an expected level of return.