Portfolio Construction & Planning

Question 1

2 Decisions when deciding asset allocations

Answer 1

• investors financial objective
• investors tolerance/capacity for risk

Question 2

what does Modern Portfolio Theory assume

Answer 2

Investors will take most favorable risk/return portfolios

Question 3

What is Deterministic Modelling

Answer 3

involves taking a single input and assume it will remain constant over a period

Question 4

What is Stochastic Modelling

Answer 4

uses many random variables to model thousands of possible investment outcomes for all asset allocations

Question 5

What does stochastic modelling establish risk rating on?

Answer 5

• The time frame of investment
• Income or growth required
• Attitude to risk
• Amount invested

Question 6

Limitations of stochastic modelling

Answer 6

• computationally hard to perform due to large number of events
• assumptions can be simple and unrealistic
• market returns hard to simulate

Question 7

What is Strategic Asset Allocation (SAA)

Answer 7

• Decisions taken from long term perspective
• 5 years min
• takes long term risk with reward trade-off

Question 8

What is tactical asset allocation (TAA)

Answer 8

• Moderately active strategy
• investors must recognise when short term opportunities have run their course and re balance portfolio to long term asset

Question 9

What is correlation between assets?

Answer 9

measures return of 2 assets movement overtime scaled +1 to -1
1 = strong correlation
-1 = negative correlation
0 = no correlation

Question 10

What are 3 factors of Investment Performance?

Answer 10

• Historic level of return
• Historic level of risk
• level of correlation between investment returns and each asset class

Question 11

Advantages of Historical data

Answer 11

• considers single asset performance
• unearth trends
• can be used to contain statistical measures

Question 12

Disadvantages of Historical data

Answer 12

• correlations between asset classes has increased
• volatility in markets has increased
• difficult to predict market behavior

Question 13

What does Reduction in Yield (RIY) measure?

Answer 13

impact of charges on a policy

Question 14

What to do when using RIY

Answer 14

• Take into account initial and ongoing charges and show affect over 10 years
• Tabulate results
• Provide RIY through table, listing all funds

Question 15

What is a limitation of RIY

Answer 15

presents info at 1 moment in time, does not show impact over small periods

Question 16

What is fundamental analysis?

Answer 16

use real data to evaluate a securities underlying value and potential for future growth with the end goal to produce a value which investors can compare with current price

Question 17

What is technical analysis?

Answer 17

analyse securities by analysing the statistics generated by market activity

Question 18

3 assumptions for Technical Analysis

Answer 18

• market discounts everything
• prices move in trends
• history tends to repeat itself

Question 19

What is Fund analysis?

Answer 19

Assesses a number of different aspects of a fund to determine whether they are appropriate

Question 20

What aspects of a fund does fund analysis analyse?

Answer 20

• investment objective
• investment philosophy
• fund manager tenure
• past performance
• volatility
• assets held in fund

Question 21

Tools for evaluating companies ESR performance

Answer 21

• Compliance with stewardship and codes and regulation
• alignment with global and national targets
• inclusion in ESR index

Question 22

Factors to consider when choosing investment provider

Answer 22

• size and position of market
• administrative efficiency
• competitive charges
• features and benefits of product
• financial ratings

Question 23

What are wrap platforms

Answer 23

allows clients to invest in a variety of products via single provider

Question 24

Advantages of wrap platforms for investors

Answer 24

• unprecedented overview and control of investments
• far greater choice in fund managers, providers and asset classes