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Redmill AF4 > Quick comparison > Flashcards

Quick comparison Flashcards

1
Q

What is the tax situation on Cash, Fixed Int, Equities and property

A

Cash, Fixed Int, Equities and property

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2
Q

What are the options, products available etc in Cash, Fixed Int, Equities and property

A

Cash, Fixed Int, Equities and property

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3
Q

What are the risks associated to Cash, Fixed Int, Equities and property

A

Cash, Fixed Int, Equities and property

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4
Q

Describe the liquidity situation on Cash, Fixed Int, Equities and property

A

Cash, Fixed Int, Equities and property

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5
Q

How can you deal / trade Cash, Fixed Int, Equities and property

A

Cash, Fixed Int, Equities and property

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6
Q

What are types of index’s are used to compare UT / OEICS / IT

A

UT / OEICS / IT

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7
Q

What are the costs / charges associated to UT / OEICS / IT

A

UT / OEICS / IT

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8
Q

how can you buy UT / OEICS / IT

A

UT / OEICS / IT

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9
Q

What are the aims / objectives of UT / OEICS / IT

A

UT / OEICS / IT

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10
Q

Which investments are covered under FSCS UT / OEICS / IT

A

UT / OEICS / IT

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11
Q

What is the taxation within UT / OEICS / IT

A

UT / OEICS / IT

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12
Q

What is the taxation situation on the investor UT / OEICS / IT

A

UT / OEICS / IT

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13
Q

What do UT / OEICS / IT offer in terms of the underlying investments

A

UT / OEICS / IT

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14
Q

What are the risks? UT / OEICS / IT

A

UT / OEICS / IT

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15
Q

How liquid are UT / OEICS / IT

A

UT / OEICS / IT

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16
Q

Howare UT / OEICS / IT traded

A

UT / OEICS / IT

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17
Q

Can UT / OEICS / IT borrow and if so to what extent

A

UT / OEICS / IT

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18
Q

Which body regulates UT / OEICS / IT

A

UT / OEICS / IT

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19
Q

Legal owner / responsibilities
UT / OEICS / IT

A

UT / OEICS / IT

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20
Q

who manages UT / OEICS / IT

A

UT / OEICS / IT

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21
Q

what is the structure UT / OEICS / IT

A

UT / OEICS / IT

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22
Q

what are the tariff ISAS PERSONAL PENSIONS INVESTMENT BONDS

A

ISAS PERSONAL PENSIONS INVESTMENT BONDS

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23
Q

what are the product options / types
ISAS PERSONAL PENSIONS INVESTMENT BONDS

A

ISAS PERSONAL PENSIONS INVESTMENT BONDS

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24
Q

what is the level of protection
ISAS PERSONAL PENSIONS INVESTMENT BONDS

A

ISAS PERSONAL PENSIONS INVESTMENT BONDS

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25
Q

contribution limits
ISAS PERSONAL PENSIONS INVESTMENT BONDS

A

ISAS PERSONAL PENSIONS INVESTMENT BONDS

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26
Q

what is the accessibility / flexibility
ISAS PERSONAL PENSIONS INVESTMENT BONDS

A

ISAS PERSONAL PENSIONS INVESTMENT BONDS

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27
Q

what are the tax rules
ISAS PERSONAL PENSIONS INVESTMENT BONDS

A

ISAS PERSONAL PENSIONS INVESTMENT BONDS

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28
Q

what is the suitability of cash on the investor and as an investment

A
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29
Q

what can fixed interest securities provide to the investor

A
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30
Q

what is the suitability of equities on the investor and as an investment

A
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31
Q

How can interest rate risk effect cash within an investment

A
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32
Q

How can interest rate risk effect fixed interest

A
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33
Q

How can interest rate risk effect equities

A
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34
Q

How can interest rate risk effect property within investment

A
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35
Q

How can inflation rate risk effect cash and fixed interest

A
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36
Q

How can inflation rate risk effect on equities and property

A
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37
Q

how can credit / default risk effect cash, fixed interest and equities

A
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38
Q

How can market risk effect fixed interest, equities and property

A
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39
Q

How can currency risk effect cash, fixed interest and equities

A
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40
Q

how can liquidity risk effect fixed interest

A
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41
Q

how can liquidity risk effect equities

A
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42
Q

how can liquidity risk effect property

A
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43
Q

Can interest rates effect the performance on cash, fixed interest, equities and property

A

Yes to all

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44
Q

Can inflation effect the performance on cash, fixed interest, equities and property

A

Cash & Fixed Interest

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45
Q

Can political factors effect the performance on cash, fixed interest, equities and property

A

Yes to all

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46
Q

can the credit worthiness of a firm effect the performance on cash, fixed interest, equities and property

A

Yes to all

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47
Q

Can the term to maturity effect the performance on cash & fixed interest,

A

Yes to all

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48
Q

Can investor sentiment effect the performance on cash, fixed interest, equities and property

A

Equities only

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49
Q

can profit / dividend expectations effect the performance on cash, fixed interest, equities and property

A

Equities only

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50
Q

Can takeover activity effect the performance on cash, fixed interest, equities and property

A

Equities only

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51
Q

Can location of property effect the performance on cash, fixed interest, equities and property

A

Property only

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52
Q

Can age / condition of property effect the performance on cash, fixed interest, equities and property

A

Property only

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53
Q

Can availability of tenants effect the performance on cash, fixed interest, equities and property

A

Property only

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54
Q

What is the basic criteria and set-up of an OEIC?

A
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55
Q

What is the basic criteria and set-up of a unit trust?

A
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56
Q

What is the basic criteria and set-up of a investment trust?

A
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57
Q

What is the tax situation in an unit trust and OEIC within the fund

A
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58
Q

What is the tax situation in an unit trust and OEIC on the investor

A
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59
Q

What is the tax situation in an investment trust within the fund

A
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60
Q

What is the tax situation in an investment trust on the investor

A
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61
Q

what is the structure of an unit trust

A
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62
Q

what is the structure of an OEIC

A
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63
Q

what is the structure of an Investment trust

A
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64
Q

ISA contribution limits?

A
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65
Q

Pension contribution limits

A
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66
Q

Investment bond contribution limits

A
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67
Q

Accessibility / Restrictions / Flexibility ISAs

A
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68
Q

Accessibility / Restrictions / Flexibility Pensions

A
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69
Q

Accessibility / Restrictions / Flexibility Investment bonds

A
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70
Q

Tax rules ISA

A
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71
Q

Tax Rules pensions

A
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72
Q

Tax Rules investment bonds

A
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73
Q

Candy is 45 and a higher rate taxpayer. She is interested in increasing her
retirement savings significantly and is looking at a number of investment
options.
One of the investment options she is considering is a SIPP. Explain to Candy
how this product would work as a method of saving for retirement

A
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74
Q

Candy is 45 and a higher rate taxpayer. She is interested in increasing her
retirement savings significantly and is looking at a number of investment
options.
One of the investment options she is considering is a SIPP.
Candy has also heard that an onshore investment bond can add
diversification to retirement planning. Explain to Candy the advantages
of using an investment bond to provide retirement income

A
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75
Q

Candy has stated that she has heard that she can reduce her tax bill for 23/24 if she
invests in a SEIS. Describe to her how this may work - ignoring qualifying conditions for the scheme itself

A
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76
Q

Calculate, showing all your working, the running yield for holding A

A
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77
Q

.Calculate, showing all your working, the running yield for holding B

A
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78
Q

.Calculate, showing all your working, the running yield for holding C

A
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79
Q

.Calculate, showing all your working, the running yield for holding D

A
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80
Q

.Calculate, showing all your working, the running yield for holding E

A
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81
Q

.Calculate, showing all your working, the running yield for holding F

A
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82
Q

.Calculate, showing all your working, the running yield for holding G

A
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83
Q

.Calculate, showing all your workings, the running yield on the portfolio weighted by the current price

A
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84
Q

. Calculate, showing all your working, dividend yield for share A

A
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85
Q

. Calculate, showing all your working, dividend yield for share B

A
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86
Q

. Calculate, showing all your working, dividend yield for share C

A
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87
Q
  1. Calculate, showing all your working, Earnings Per share for Share D if the company makes profits of £1.2m, and pays tax / preference share dividends and other minority interests of £117,000
A
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88
Q

. Calculate, showing all your working, Earnings Per Share for Share E if the company makes profits of £870,000 and pays tax / preference share dividends and other minority interests of £245,000.

A
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89
Q
  1. Calculate, showing all your working, dividend cover for share B for 2023
A
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90
Q

. Calculate, showing all your working, dividend cover for share C for 2023

A
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91
Q
  1. Calculate, showing all your working, dividend cover for share E for 2023
A
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92
Q
  1. Calculate the portfolio dividend yield weighted by share price
A
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93
Q
  1. Compare the quality of share B and share C, taking account of dividend yield, dividend cover and change in earnings per share.
A
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94
Q

Premium bonds - what is the maximum / minimum limits?

A
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95
Q

Fixed Savings
Certificates &
Index-Linked Savings
Certificates - Maximum / minimum limits?

A
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96
Q

What terms are applicable to premium bonds

A

N/A

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97
Q

Fixed Savings
Certificates &
Index-Linked Savings
Certificates - terms?

A

2, 3 or 5 years

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98
Q

Premium bonds accessibility

A
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99
Q

Fixed Savings
Certificates &
Index-Linked Savings
Certificates - accessibility?

A
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100
Q

Are premiums issued on a fixed, variable interest?

A
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101
Q

Fixed Savings
Certificates - fixed or variable interest?

A

Fixed

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102
Q

Index-Linked Savings
Certificates - fixed / variable interest?

A

Fixed + CPI uplift

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103
Q

Premium bonds - When is
interest paid?

A

N/A

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104
Q

Fixed Savings
Certificates &
Index-Linked Savings
Certificates - when is interest paid?

A

Paid with capital on maturity

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105
Q

describe the basics of premium bonds

A

Savers can win a prize of up to £1m, so this product is not about saving in the
conventional way, but instead holding cash in a secure manner whilst having a 22,000/1 chance of winning a tax-free cash prize.

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106
Q

describe the basics of Fixed Savings
Certificates &
Index-Linked Savings
Certificate

A

Suitable for savers who are looking to lock their savings away for several years on the promise of receiving their deposit but interest at maturity. On maturity, certificates
can be rolled over into a new issue (if available). Can be held in trust.

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107
Q

NS&I Direct Saver min/ max limits

A

£1/£2m per person (can be held jointly)

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108
Q

NS&I Direct Income and guaranteed bonds min/ max limits

A

£500/£1m per person (can be held jointly)

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109
Q

NS&I Direct green saving bonds min/ max limits

A

£100/£100,000 per person (can
be held jointly)

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110
Q

NS&I Direct Saver and income bonds term

A

N/A

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111
Q

NS&I Guaranteed bonds term

A

1 year

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112
Q

NS&I green savings bonds term

A

3 Year

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113
Q

NS&I Direct Saver & Income bonds accessibility

A

Easy access without penalty

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114
Q

NS&I guaranteed & green savings bonds accessibility

A

Cannot access capital until end of the term.

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115
Q

NS&I Direct Saver & Income bonds Fixed / Variable interest?

A

Variable

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116
Q

NS&I guaranteed & green savings bonds Fixed / Variable interest?

A

Fixed

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117
Q

NS&I Direct Saver - when is interest paid?

A

Annually, as a top-up

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118
Q

NS&I Income bonds - When is interest paid?

A

Monthly, as an income

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119
Q

NS&I Guaranteed bonds - when is interest paid?

A

Income Bond – monthly.
Growth Bond – paid with capital at maturity

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120
Q

NS&I green savings bonds - when is interest paid?

A

Paid with capital at maturity.

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121
Q

What are the main set-up of NS&I Direct Saver accounts?

A

Suitable for individuals who wish to
make sizeable cash deposits
beyond the FSCS compensation limits.

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122
Q

What are the main set-up of NS&I income bonds?

A

Suitable for individuals who wish to
generate income from their savings
whilst having access to capital. Can
be held in trust.

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123
Q

What are the main set-up of NS&I guaranteed bonds?

A

Suitable for individuals who wish to benefit from fixed interest savings terms for a
short period, but do not require access until the end of that term. Can be held in trust.

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124
Q

What are the main set-up of NS&I green savings bonds?

A

Suitable for individuals who want a guaranteed return on a more ethically focused product over a 3-year term, but do not require access over the term. Can be held in trust.

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125
Q

You will soon meet with your clients, Abraham (58), and Kim (57), to discuss their investments and provide ongoing advice. They are married, approaching retirement, and considering how their investments can be used to support their income needs, and whether additional investments need to be made. Abraham is a higher rate taxpayer and Kim is a basic rate taxpayer.
Abraham’s investments are held across a Stocks and Shares ISA and a General Investment Account (GIA). The ISA is currently valued at £320,000 and is invested across three FTSE 250 listed equities. Abraham would like to discuss the possibility of rebalancing the ISA and investing in either Exchange Traded Funds
(ETFs) or multi-asset collective funds.
Abraham’s GIA is currently valued at £165,000 and is invested in a Global Equity OEIC which has a yield of 6.5%. The Ongoing Charges Figure (OCF) for this fund is 1.25%. Kim’s investments are all held in her personal pension, which is currently valued at £290,000. The pension is invested in a UK Equity OEIC, and the fund factsheet states that this fund has a concentrated/high conviction approach and can hold unlisted securities.
Whilst Abraham and Kim are healthy and have average life expectancy, they are both concerned about how their investments will be treated on death, in particular any tax implications.

a) Identify four risks to which Abraham would remain exposed if he retained the direct equity holdings in his ISA rather than selling them and re-investing into multi-asset collective fund. (4)

A

Lack of asset class diversification – the entire ISA is equity focused.

Lack of geographical/sector diversification – all three holdings are FTSE 250 listed.

Market risk – the risk of fluctuations in value

No FCSC compensation available – if the companies issuing the shares were to fail, there would be no regulatory protection and Abraham would lose his entire investment.

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126
Q

You will soon meet with your clients, Abraham (58), and Kim (57), to discuss their investments and provide ongoing advice. They are married, approaching retirement, and considering how their investments can be used to support their income needs, and whether additional investments need to be made. Abraham is a higher rate taxpayer and Kim is a basic rate taxpayer.
Abraham’s investments are held across a Stocks and Shares ISA and a General Investment Account (GIA). The ISA is currently valued at £320,000 and is invested across three FTSE 250 listed equities. Abraham would like to discuss the possibility of rebalancing the ISA and investing in either Exchange Traded Funds
(ETFs) or multi-asset collective funds.
Abraham’s GIA is currently valued at £165,000 and is invested in a Global Equity OEIC which has a yield of 6.5%. The Ongoing Charges Figure (OCF) for this fund is 1.25%. Kim’s investments are all held in her personal pension, which is currently valued at £290,000. The pension is invested in a UK Equity OEIC, and the fund factsheet states that this fund has a concentrated/high conviction approach and can hold unlisted securities.
Whilst Abraham and Kim are healthy and have average life expectancy, they are both concerned about how their investments will be treated on death, in particular any tax implications

b) Identify eight factors Abraham should consider when deciding whether to utilise ETFs or multi-asset collectives to replace his direct equity holdings. (8)

A

Attitude to risk and alignment to ETF or multi-asset fund

Capacity for loss

Costs/Charges

The benchmark used to measure/track performance.

Dealing frequency/liquidity

Performance and reputation

Concentration/diversification of holdings
Yield/income

Mandate/style of the fund

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127
Q

You will soon meet with your clients, Abraham (58), and Kim (57), to discuss their investments and provide ongoing advice. They are married, approaching retirement, and considering how their investments can be used to support their income needs, and whether additional investments need to be made. Abraham is a higher rate taxpayer and Kim is a basic rate taxpayer.
Abraham’s investments are held across a Stocks and Shares ISA and a General Investment Account (GIA). The ISA is currently valued at £320,000 and is invested across three FTSE 250 listed equities. Abraham would like to discuss the possibility of rebalancing the ISA and investing in either Exchange Traded Funds
(ETFs) or multi-asset collective funds.
Abraham’s GIA is currently valued at £165,000 and is invested in a Global Equity OEIC which has a yield of 6.5%. The Ongoing Charges Figure (OCF) for this fund is 1.25%. Kim’s investments are all held in her personal pension, which is currently valued at £290,000. The pension is invested in a UK Equity OEIC, and the fund factsheet states that this fund has a concentrated/high conviction approach and can hold unlisted securities.
Whilst Abraham and Kim are healthy and have average life expectancy, they are both concerned about how their investments will be treated on death, in particular any tax implications

c) Based on the current value of Abraham’s GIA, calculate, showing all your workings, the income tax due on the income received from the investment for the current tax year, and suggest two ways in which Abraham could mitigate/reduce this liability going forward. (8)

A

As the fund is an equity fund, it will pay dividends as opposed to interest.

Dividend received = 6.5% x £165,000 = £10,725 Dividend allowance = £1,000
Taxable dividend = £10,725 – £1,000 = £9,725

Tax liability (higher rate) = £9,725 x 33.75% = £3,282

Mitigation
Transfer part/all of the investment to Kim as she is a basic rate taxpayer and will pay a
lower tax liability (such a transfer will be exempt from CGT and IHT).

Consider using Abraham’s annual CGT exemption to move funds from the GIA into the ISA each year, thus reducing the overall income tax liability on his investment income as ISAs are free of income tax.

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128
Q

You will soon meet with your clients, Abraham (58), and Kim (57), to discuss their investments and provide ongoing advice. They are married, approaching retirement, and considering how their investments can be used to support their income needs, and whether additional investments need to be made. Abraham is a higher rate taxpayer and Kim is a basic rate taxpayer.
Abraham’s investments are held across a Stocks and Shares ISA and a General Investment Account (GIA). The ISA is currently valued at £320,000 and is invested across three FTSE 250 listed equities. Abraham would like to discuss the possibility of rebalancing the ISA and investing in either Exchange Traded Funds
(ETFs) or multi-asset collective funds.
Abraham’s GIA is currently valued at £165,000 and is invested in a Global Equity OEIC which has a yield of 6.5%. The Ongoing Charges Figure (OCF) for this fund is 1.25%. Kim’s investments are all held in her personal pension, which is currently valued at £290,000. The pension is invested in a UK Equity OEIC, and the fund factsheet states that this fund has a concentrated/high conviction approach and can hold unlisted securities.
Whilst Abraham and Kim are healthy and have average life expectancy, they are both concerned about how their investments will be treated on death, in particular any tax implications

d) List four fees that are included within the OCF on Abraham’s GIA. (4)

A

Annual management charges
Admin charges
Marketing costs
Audit/compliance fees
Regulatory costs/fees
Custody/depositary costs

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129
Q

You will soon meet with your clients, Abraham (58), and Kim (57), to discuss their investments and provide ongoing advice. They are married, approaching retirement, and considering how their investments can be used to support their income needs, and whether additional investments need to be made. Abraham is a higher rate taxpayer and Kim is a basic rate taxpayer.
Abraham’s investments are held across a Stocks and Shares ISA and a General Investment Account (GIA). The ISA is currently valued at £320,000 and is invested across three FTSE 250 listed equities. Abraham would like to discuss the possibility of rebalancing the ISA and investing in either Exchange Traded Funds
(ETFs) or multi-asset collective funds.
Abraham’s GIA is currently valued at £165,000 and is invested in a Global Equity OEIC which has a yield of 6.5%. The Ongoing Charges Figure (OCF) for this fund is 1.25%. Kim’s investments are all held in her personal pension, which is currently valued at £290,000. The pension is invested in a UK Equity OEIC, and the fund factsheet states that this fund has a concentrated/high conviction approach and can hold unlisted securities.
Whilst Abraham and Kim are healthy and have average life expectancy, they are both concerned about how their investments will be treated on death, in particular any tax implications

e) Briefly explain to Kim three options available from her personal pension to provide income in retirement. (6)

A

Lifetime Annuity/Scheme Pension – this involves the pension fund being used to purchase a secure income from an insurer which is guaranteed for the rest of Kim’s life.

Flexi-Access Drawdown – this involves Kim’s pension fund remaining invested for further
growth and the flexibility to withdraw a taxable income as and when required.

Uncrystallised Fund Pension Lump Sum (UFPLS) – this involves Kim taking her pension income as a series of lump sums direct from the uncrystallised funds, with residual funds remaining invested for growth.

Phased retirement – may involve a combination of the above.

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130
Q

You will soon meet with your clients, Abraham (58), and Kim (57), to discuss their investments and provide ongoing advice. They are married, approaching retirement, and considering how their investments can be used to support their income needs, and whether additional investments need to be made. Abraham is a higher rate taxpayer and Kim is a basic rate taxpayer.
Abraham’s investments are held across a Stocks and Shares ISA and a General Investment Account (GIA). The ISA is currently valued at £320,000 and is invested across three FTSE 250 listed equities. Abraham would like to discuss the possibility of rebalancing the ISA and investing in either Exchange Traded Funds
(ETFs) or multi-asset collective funds.
Abraham’s GIA is currently valued at £165,000 and is invested in a Global Equity OEIC which has a yield of 6.5%. The Ongoing Charges Figure (OCF) for this fund is 1.25%. Kim’s investments are all held in her personal pension, which is currently valued at £290,000. The pension is invested in a UK Equity OEIC, and the fund factsheet states that this fund has a concentrated/high conviction approach and can hold unlisted securities.
Whilst Abraham and Kim are healthy and have average life expectancy, they are both concerned about how their investments will be treated on death, in particular any tax implications

f) Explain to Abraham and Kim what is meant by sequencing risk, how this could impact them should they remain invested in retirement and the steps they could take to mitigate this risk. (10)

A

Sequencing risk is the risk of withdrawing too much from an investment during or
immediately after a market downturn, which then creates a significant drag on investment growth.

In turn, this can have an impact on Abraham and Kim’s ability to maintain the long-term
value of their investments and meet their retirement income needs.

Sequencing risk is high based on Abraham and Kim’s current position as they are
predominantly invested in equities, which can fluctuate considerably in value in the short term.

Mitigation
Keep withdrawals to a minimum and access other income sources to provide retirement
income in the early years (i.e., cash deposits).

Change the timing/frequency of withdrawals.

Alter the asset allocation of their portfolio to provide greater diversification away from
equity concentration.

Increase liquidity/cash holdings.

Take natural income/dividends from investments to support retirement needs (leave capital invested).

Consider securing an income from Kim’s pension through a scheme pension or lifetime annuity.

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131
Q

You will soon meet with your clients, Abraham (58), and Kim (57), to discuss their investments and provide ongoing advice. They are married, approaching retirement, and considering how their investments can be used to support their income needs, and whether additional investments need to be made. Abraham is a higher rate taxpayer and Kim is a basic rate taxpayer.
Abraham’s investments are held across a Stocks and Shares ISA and a General Investment Account (GIA). The ISA is currently valued at £320,000 and is invested across three FTSE 250 listed equities. Abraham would like to discuss the possibility of rebalancing the ISA and investing in either Exchange Traded Funds
(ETFs) or multi-asset collective funds.
Abraham’s GIA is currently valued at £165,000 and is invested in a Global Equity OEIC which has a yield of 6.5%. The Ongoing Charges Figure (OCF) for this fund is 1.25%. Kim’s investments are all held in her personal pension, which is currently valued at £290,000. The pension is invested in a UK Equity OEIC, and the fund factsheet states that this fund has a concentrated/high conviction approach and can hold unlisted securities.
Whilst Abraham and Kim are healthy and have average life expectancy, they are both concerned about how their investments will be treated on death, in particular any tax implications

g) Explain to Kim the diversification rules for a retail UCITS OEIC, based upon the minimum number of permissible holdings and their respective percentages, and state the maximum exposure such a fund can hold in unlisted securities. (7)

A

Minimum of 16 holdings

A maximum of 10% of the fund value invested in up to four of those holdings/companies (40% in total).

Maximum of 5% of the fund value invested in the rest of the remaining holdings (60% in
total).

The maximum exposure for unlisted securities is 10% of the fund value.

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132
Q

You will soon meet with your clients, Abraham (58), and Kim (57), to discuss their investments and provide ongoing advice. They are married, approaching retirement, and considering how their investments can be used to support their income needs, and whether additional investments need to be made. Abraham is a higher rate taxpayer and Kim is a basic rate taxpayer.
Abraham’s investments are held across a Stocks and Shares ISA and a General Investment Account (GIA). The ISA is currently valued at £320,000 and is invested across three FTSE 250 listed equities. Abraham would like to discuss the possibility of rebalancing the ISA and investing in either Exchange Traded Funds
(ETFs) or multi-asset collective funds.
Abraham’s GIA is currently valued at £165,000 and is invested in a Global Equity OEIC which has a yield of 6.5%. The Ongoing Charges Figure (OCF) for this fund is 1.25%. Kim’s investments are all held in her personal pension, which is currently valued at £290,000. The pension is invested in a UK Equity OEIC, and the fund factsheet states that this fund has a concentrated/high conviction approach and can hold unlisted securities.
Whilst Abraham and Kim are healthy and have average life expectancy, they are both concerned about how their investments will be treated on death, in particular any tax implications

h) Explain to Abraham and Kim what is meant by the Additional Permitted Subscription (APS) and how this would relate to Abraham’s ISA investment on his death. (7)

A

On Abraham’s death, the value of his ISA will form part of his estate for IHT purposes.

As Abraham will have died after 6 April 2018, his ISA will become a ‘continuing ISA’ and will therefore continue to offer ISA tax advantages until the earliest of the completion of the administration of his estate, the 3rd anniversary of his death or the closure of the ISA.

The APS is the higher of the value of the ISA on Abraham’s death or the value when the
ISA ceases to be a ‘continuing ISA’.

The APS is an additional ISA allowance that will be available to Kim in addition to her own personal ISA allowance of £20,000.

This would allow Kim herself to make additional ISA investments and achieve greater levels of tax efficiency with her investments.

The APS can be used to make a deposit into a cash ISA.

The APS can be used to fund a stocks and shares ISA, or transfer Abraham’s ISA holdings across into Kim’s ISA without needing to sell and repurchase holdings.

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133
Q

a) Identify five specific risks to which Tania may currently be exposed within her investment portfolio and state one reason for each risk. (10)

A

Market risk – the risk of Tania’s investments fluctuating in value due to being over-exposed to the stock market.
Diversification risk – Tania’s portfolio is heavily concentrated on equities and lacks
exposure to other asset classes such as property, fixed interest, and cash, which can help to manage risk and provide steady returns.
Liquidity risk – this is particularly focused on Tania’s investment trust investment which is
closed-ended and therefore may be more illiquid than the unit trust and OEICs. It may be difficult for Tania to sell her investment trust shares as there may not be sufficient demand to enable her to sell the shares at the price she wants and at the time she wants to sell.
Default/credit risk – in the event of any of her providers defaulting/becoming insolvent, Tania’s protection/compensation will be limited to FSCS prescribed levels. Given the level of investment she has with each provider, there is a strong likelihood that she won’t be able to claim the full value of her investments back and could therefore suffer financial loss as a result.
Currency risk – this specifically applies to the emerging markets and US investments which will be denominated in a different currency and any income or gains will have to be converted into GBP in Tania’s hands. This could be problematic for her if foreign exchange rates fluctuate to her disadvantage.
Political risk – Tania’s emerging markets investments will be most exposed to this, as
emerging market investments tend to be at risk of political influence or manipulation. This could make it more difficult for Tania to access such investments and could also lead to wild fluctuations in value.
Shortfall risk – This is the risk that Tania’s target growth or income from this portfolio is not achieved over the term and is heightened here due to Tania’s high exposure to the stock market through her equity holdings.

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134
Q

b) Describe the main differences in the legal structure, regulation, and management of an OEIC and an Investment Trust. (8)

A

An OEIC is a limited liability company governed by an instrument of incorporation.
An Investment Trust is a listed public company governed by a memorandum and articles of association.
An OEIC is open-ended.
An Investment Trust is closed-ended.
An OEIC is regulated by the FCA.
An Investment Trust is regulated by the Companies Act.
An OEIC is managed by an Authorised Corporate Director (ACD), with investments held by the Depositary.
An Investment Trust is managed by a fund manager/board of directors.

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135
Q

c) Describe the main differences in the valuation, pricing, and trading of an OEIC and an Investment Trust.
(8)

A

An OEIC’s method of valuation is defined in regulation.
An Investment Trust’s method of valuation is based on market price.
An OEIC is usually valued at least daily.
An Investment Trust is usually valued at least monthly.
Most OEICs are priced on a single price basis reflecting the net asset value (NAV) of the underlying assets.
An Investment Trust is priced based on supply and demand, and therefore the share price may be trading at a discount or premium to NAV.
OEIC shares are mostly purchased and sold through the OEIC manager.
Investment Trust shares are mostly purchased and sold through a stockbroker.

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136
Q

d) Explain three benefits and three risks of Tania proceeding with the investment into the Brazilian corporate bond. (12)

A
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137
Q

e) Outline the factors you would need to consider before advising Tania on an investment into a fixed interest collective investment for her portfolio. (8)

A

Attitude to risk
Capacity for loss
Objectives and time horizons
Specific income requirements at each stage of Tania’s life
Tania’s views on inflation
Tania’s views on interest rates
Tania’s specific investment preferences (ethical, ESG etc.)
Tania’s current and projected future tax status
Emergency fund/liquidity requirements
Tania’s views on costs and charges

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138
Q

d) Comment on the maximum Financial Services Compensation Scheme (FSCS) compensation limits that would apply to Tania’s investments. You should assume here that she makes the investment into the Brazilian corporate bond. (4)

A

Tania would receive no compensation/protection from the FSCS should her Brazilian corporate bond provider default or become insolvent.
As Investment Trusts are structured as listed companies, the FSCS would not provide
protection against the failure of Tania’s investment trust.
Tania’s OEICs and Unit Trust will be protected up to a maximum of £85,000 per
firm/provider.
Based on the current value of Tania’s OEIC and Unit Trust holdings (£475,000), the
maximum FSCS compensation available would be £170,000 (£85,000 x 2 providers),
therefore Tania would stand to lose up to £305,000.

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139
Q

a) Briefly explain to Agnessa, the potential reasons why the Property OEIC is currently holding a high level of cash and comment on the effects of holding this level of cash within the investment.
(8).

A
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140
Q

b) Explain to Agnessa the two main differences between open-ended and closed-ended fund structures and state four ways in which her Property OEIC could respond to a liquidity crisis
following a significant volume of redemption requests from shareholders. (8)

A
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141
Q

c) Explain briefly how the gearing ratio of 165% on the Investment Trust should be interpreted and state three benefits and three drawbacks for Agnessa in relation to this investment being able to gear. (10)

A
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142
Q

d) Explain to Agnessa the main differences between Undertakings for Collective Investment in Securities (UCITS) and Unregulated Collective Investment Schemes (UCIS) that can result in UCIS having higher risk.
(8)

A
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143
Q

e) Explain to Agnessa the safeguarding regulations in place that govern UCITS in respect of borrowing. (4)

A
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144
Q

f) Agnessa is considering the partial or full encashment of the Onshore Investment Bond to provide additional funds available for re-investment in her investment strategy. Explain to her the two main options for accessing the bond for this purpose, and comment on the associated
tax treatment (no calculation required and assume the bond is not segmented). (10)

A
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145
Q

g) Briefly explain to Agnessa four benefits of investing her inherited cash in a National Savings & Investments product as opposed to a cash ISA. (4)

A
146
Q

h) Describe to Agnessa, the key features and tax treatment of NS&I Income Bonds, and comment on their suitability in meeting her objectives for her cash holding. (8)

A
147
Q

EIS - tax relief on investments?

A

30% income tax reducer , but shares must be held for 3 years.

148
Q

SEIS - tax relief on investments?

A

50% income tax reducer , but shares must be held for 3 years.

149
Q

VCT - tax relief on investments?

A

30% income tax reducer , but shares must be held for 5 years.

150
Q

EIS - Investment limits

A

£2m (excess over £1m must be in knowledge- intensive companies)

151
Q

SEIS - Investment limits

A

£200,000

152
Q

VCT Investment limits

A

£200,000

153
Q

SEIS & EIS taxation on dividends

A

Dividends subject to income tax
(after use of £1 ,000 dividend allowance)
(0%, 8.75%, 33.75%, 39.35%)

154
Q

VCT taxation on dividends

A

exempt

155
Q

SEIS & EIS tax on disposals

A

Gains are liable to Capital Gains Tax if disposed of within three years and income tax relief has not been taken
(£6,000 annual exempt ion, then gains charged at 10% or 20%)

156
Q

VCT tax on disposals

A

Exempt f rom CGT

157
Q

EIS CGT Deferral

A

Gains made on other assets can be defer red by reinvesting in an EIS (must
be done within one year prior or three years after the gain is made) .

158
Q

SEIS CGT Deferral

A

CGT deferral not available (However , reinvestment relief applies – which allows
the individual to treat a maximum of 50% of the gain from any asset as exempt
from CGT if proceeds are reinvested into a SEIS)

159
Q

VCT CGT Deferral

A

N/A

160
Q

SEIS & EIS IHT treatment

A

Qualify for Business Relief, meaning that the investment can pass on death free of IHT, as long as the shares are held for at least two years.

161
Q

VCT IHT treatment

A

Business Relief not available, so on death the VCT shares will form part of
the investor ’s estate and be
potentially liable to IHT.

162
Q

EIS Qualifying conditions

A
163
Q

SEIS Qualifying conditions

A
164
Q

VCT Qualifying conditions

A
165
Q

PAIFs features and structure

A

An FCA authorised OEIC that invests
predominantly in proper ty (can include REITs)

166
Q

REIT features and structure

A
167
Q

PAIF - what conditions must be met

A
168
Q

REIT what conditions must be met

A
169
Q

Internal tax treatment of a PAIF

A
170
Q

Internal tax treatment of a REIT

A
171
Q

Tax treatment on investor - PAIF

A
172
Q

Tax treatment on investor - REIT

A
173
Q

Risks of investing in commodities

A

Price volatility

Pricing is largely driven by availability of information which may not be as accessible to private investors as it is for larger companies with dedicated research

Highly illiquid, especially in relation to physical commodities

High level of costs involved

174
Q

Name physical commodities

A
175
Q

What are ETCs

A

Similar to an ETF, t racking the performance of under lying commodities

Investor is not exposed directly to the under lying physical commodity

176
Q

What are the benefits of Investing in commodities

A
177
Q

Drawbacks of investing in commodities

A
178
Q

What are futures

A
179
Q

What are options?

A
180
Q

What is counterparty

A
181
Q

What is an initial margin

A
182
Q

What is variation margin

A
183
Q

what is marking to market

A
184
Q

What does it mean to take a long position

A
185
Q

What does it mean to take a short position

A
186
Q

What is a Exchange Delivery Settlement Price (EDSP)

A
187
Q

Describe a call option?

A
188
Q

Describe a put option?

A
189
Q

what is the holder of an option?

A
190
Q

what does the phrase marking to marker describe?

A
191
Q

what is the writer of an option?

A
192
Q

what is the premium when dealing in options

A
193
Q

what is the strike / exercise price

A
194
Q

Describe intrinsic value

A
195
Q

when is an option at the money

A
196
Q

when is an option in the money

A
197
Q

when is an option out of the money

A
198
Q

what is time value when dealing in options

A
199
Q

what is a European style option

A
200
Q

what is an American style option

A
201
Q

how can we use options / futures to hedge a future purchase

A
202
Q

how can we use options / futures to hedge a portfolio

A
203
Q

how can we use options / futures for portfolio diversification

A
204
Q

How can arbitrage theory be used when investing in futures /options

A
205
Q

How can we use options / future to increase portfolio income

A
206
Q

How can we use options / future for cash flow management

A
207
Q
A
208
Q
A
209
Q

What are warrants

A
210
Q

What are covered warrants

A
211
Q

What are contracts for difference

A
212
Q

What are swaps

A
213
Q

Describe Long / Short funds

A
214
Q

what is an absolute fund

A
215
Q

Describe relative value

A
216
Q

Describe event driven

A
217
Q

Describe tactical trading

A
218
Q

what are the drawbacks of hedge funds

A

Risks/Drawbacks
Investment risk
Gearing
Expensive
Regulation (lack of)
Access

219
Q

what are the features of structured products

A
220
Q

what are the types /methods of structured products

A
221
Q

what are some factors to consider when investing in structured products

A

Factors to consider
Type of product
Details of sums payable and guarantees
Payment conditions
Term and repayment dates
Early encashment penalties

222
Q

Benefits of structured products

A
223
Q

Drawbacks of structured products

A
224
Q

Explain, in detail, income and capital gains tax benefits of SEIS

A
225
Q

Explain, in detail, income and capital gains tax benefits of EIS

A
226
Q

Explain, in detail, income and capital gains tax benefits of VCT

A
227
Q

. To qualify as an EIS, the following conditions must be met:

A
228
Q

. To qualify as an REIT, the following conditions must be met:

A
229
Q
  1. What are the advantages and disadvantages of investing in buy to let
    property compared to investing through a REIT?
A

Advantages
► Ability to select property
► Can be ‘hands-on’ in management of property
► An asset class with which investor is likely to be familiar from their own
home
► Availability of cheap borrowing allowing for gearing
► Returns have traditionally been very strong

Disadvantages
► Too great an exposure to single investment – ‘all eggs in one basket’
► Could have periods without a tenant
► Will have costs attached to management of the property unless selfmanaged
► Self-management will involve time and effort
► Costs associated with direct investment are now high – stamp duty, 8%
loading on capital gains tax and ongoing changes to the way interest is allowed
against tax on rent
► REIT will give exposure to commercial property which tends to be a stable
asset class
► May be illiquid

230
Q
  1. Calculate the trading premium / discount for the CarrJim REIT at the end of
    2022 and 2023.
  2. What might have caused the change?
A

► End of 2022 Price £1.10, NAV 95p
► 1.10 / 0.95 = 1.158
► Trading at a premium of 15.8%
► End of 2023 Price £1.06, NAV £1.02
► 1.06 / 1.02 = 1.039
► Trading at a premium of 3.9%

231
Q
A
232
Q
  1. Calculate the annual compound return on the AnyCo plan if held to maturity
A
233
Q

a) State, and explain, five risks commonly associated with direct property investment. (10)

A
234
Q

b) State the conditions that must be met for a property fund to qualify as a property authorised investment fund (PAIF). (6)

A
235
Q

c) State the main rules that a fund must adhere to in order to qualify as a REIT. (8)

A
236
Q

d) Calculate, showing all workings, the net income that would be payable from the PAIF and the REIT illustrated in the table above (assume only one investment will be made). (12)

A
237
Q

e) State six benefits and four drawbacks of Alok investing in physical gold as a component of his portfolio. (10)

A
238
Q

f) Outline four other ways in which Alok can invest in gold. (4)

A
239
Q

a) Calculate the total sum Sally has available for new investment, assuming she wants to invest the property gain and her PCLS. (2)

A

PCLS = 25% x £300,000 = £75,000
Property gain = £120,000
Total = £195,000

240
Q

b) Describe the role that the four main asset classes will play in Sally’s pension drawdown portfolio. (12)

A
241
Q

c) Using the answer to a), calculate the maximum amount of income tax relief Sally would be entitled to if she invested in an Enterprise Investment Scheme (EIS), and comment how this relief would be given and any specific conditions that apply. (5)

A
242
Q

d) Explain to Sally the CGT deferral relief that may be available to her should she choose to invest in an EIS. (10)

A
243
Q

e) Evaluate the main factors that will drive whether an EIS investment is or is not suitable for Sally’s needs. (10)

A
244
Q

f) State the conditions that must apply for an investment to be approved by HMRC as a Venture Capital Trust. (12)

A
245
Q

g) Briefly explain to Sally the extent to which a VCT investment may support her retirement and estate planning needs. (8)

A
246
Q

h) State three benefits and three risks associated with Sally choosing instead to invest in AIM shares. (6)

A
247
Q

a) Describe which type of structured product Harrison holds and briefly explain how the auto-call
facility operates. (5)

A
248
Q

b) Harrison will make a gain of £20,000 when his structured product pays out. Calculate, showing your workings, how much CGT will be payable (if any), and briefly explain how he can manage any CGT liabilities through investment into a SEIS. (7)

A
249
Q

c) Calculate, showing your workings, the minimum investment Harrison would need to make to a SEIS to
mitigate his 2023/24 income tax liability in full, and explain any conditions that must apply. (6)

A
250
Q

d) Explain to Harrison three different types of hedge fund investment strategy. (9)

A
251
Q

e) List six risks Harrison may be exposed to by having an investment in a hedge fund. (6)

A
252
Q

f) Harrison has identified that his hedge fund is taxed on a reporting fund basis. Explain to him the
key differences between the taxation of reporting and non-reporting funds (assume that Harrison is
UK resident and UK domiciled). (10)

A
253
Q

g) Harrison is keen to invest the proceeds from his structured product across several FTSE 100 companies but is concerned that the FTSE 100 will rise significantly over the next few months.
Explain to Harrison how futures and options could be used in this case to protect his position. (10)

A

Options
Harrison (or his fund manager) could buy a FTSE 100 call option.
This will give Harrison the right, but not the obligation, to purchase FTSE 100 shares at
some point in the future at the agreed exercise price.
If the FTSE 100 rises above the exercise price, Harrison can exercise the option and make a
profit (as he’ll be able to buy the index for a lower price than its’ current value).
If the market falls, Harrison can just walk away and let the option lapse. All Harrison will
lose is the premium he paid up front.

254
Q

h) Explain to Harrison how call and put options can be used to generate additional income into his portfolio and comment on his obligations in such transactions. (12)

A
255
Q

what is modern portfolio theory

A

Works on the principle that investment performance is driven not only by risk and return but also the relationships between the investments in terms of price changes.

256
Q

What is the risk described with Modern portfolio theory

A
257
Q

describe correlation when looking at the model portfolio theory

A
258
Q

What does the efficient frontier curve demonstrate

A
259
Q

Assuming that labels A-E represent different investment portfolios, comment
on their relationship with the efficient frontier curve and with each other.

A
260
Q

within the CAPM formula describe beta

A
261
Q

what are the assumptions taken with the CAPM

A
262
Q

What are the limitations with the CAPM

A
263
Q

describe briefly the efficient market hypothesis

A

Theory that market prices are always correct and provide an indication of the true
value of a security.

Security prices reflect all available information, so any new information will impact the price.

Assumes no undervalued or overvalued securities exist

264
Q

Describe weak form EMH

A
265
Q

Describe semi - strong form EMH

A
266
Q

Describe strong form EMH

A
267
Q

describe Prospect Theory/Loss
Aversion

A
268
Q

Describe Regret

A
269
Q

Describe Overconfidence/
Over and under react ion

A
270
Q

Describe the top down process

A
271
Q

Describe the bottom up process

A
272
Q

Describe a combined advice approach (Bottom up and top down)

A
273
Q

Fund management styles (for
bottom up management)

Describe value management style

A
274
Q

Fund management styles (for
bottom up management)

Describe Growth at a
reasonable price
(GAARP) management style

A
275
Q

Fund management styles (for
bottom up management)

Describe Momentum management style

A
276
Q

Fund management styles (for
bottom up management)

Describe Contrarianism management style

A
277
Q
  1. Calculate the expected return on the three investments over the period.
A

Dandymoney = 2% + (1.2 x (8.5% - 2%)) = 2% + 7.8% = 9.8%

278
Q
  1. Calculate the expected return on the three investments over the period
A

Beanoinvest = 2% + (0.5 x (8.5% - 2%)) = 2% + 3.25% = 5.25%

279
Q
  1. Calculate the expected return on the three investments over the period.
A

BeezerGlobal = 2% + (0.8 x (8.5% - 2%)) = 2% + 5.2% = 7.2%

280
Q
  1. Calculate the alpha on the three investments over the period.
A

Dandymoney = 10% - 9.8% = 0.2%

281
Q
  1. Calculate the alpha on the three investments over the period.
A

Beanoinvest = 7.5% - 5.25% = 2.25%

282
Q
  1. Calculate the alpha on the three investments over the period.
A

BeezerGlobal = 12% - 7.2% = 4.8%

283
Q
  1. Calculate the standard deviation on the three investments
A

Dandymoney = 60 = 7.75%

284
Q
  1. Calculate the standard deviation on the three investments
A

Beanoinvest = 89 = 9.43%

285
Q
  1. Calculate the standard deviation on the three investments
A

BeezerGlobal = 75 = 8.66%

286
Q
  1. Calculate the sharpe ratio on the three investments
A

Dandymoney = (10% - 2%)/7.75% = 1.03

287
Q
  1. Calculate the sharpe ratio on the three investments
A

Beanoinvest = (7.5% - 2%)/9.43% = 0.58

288
Q
  1. Calculate the sharpe ratio on the three investments
A

BeezerGlobal = (12% - 2%)/8.66% = 1.15

289
Q
  1. Calculate the information ratio on the three investments
A

Dandymoney = (10% - 8.5%)/4% = 0.375

290
Q
  1. Calculate the information ratio on the three investments
A

Beanoinvest = (7.5% - 8.5%)/5% = -0.2

291
Q
  1. Calculate the information ratio on the three investments
A

BeezerGlobal = (12% - 8.5%)/4% = 0.875

292
Q
  1. Calculate the mean and median return for investment A
A

Mean = Average return = sum of returns/number of years
Median = Middle data point (in this case, the third data point in the series when ordered by value)

Returns on investment A (in order) = -2%, 2%, 4%, 5%, 9%

Mean Investment A = (5% + 4% - 2% + 2% + 9%)/5 = 3.6%

Median Investment A = 4%

293
Q
  1. Calculate the mean and median return for investment B
A

Returns on investment B (in order) = -4%, -1%, 6%, 10%, 12%

Mean Investment B = (6% + 10% - 4% - 1% + 12%)/5 = 4.6%

Median Investment B = 6%

294
Q
  1. Calculate the variance of the two investments.
A
295
Q
  1. Calculate the standard deviation of investments A
A
296
Q
  1. Calculate the standard deviation of investments B
A
297
Q
  1. Calculate the range of returns within two standard deviations of each investment and comment on what this shows us.
A
298
Q
  1. Calculate the range of returns within two standard deviations of each investment and comment on what this shows us.
A
299
Q
  1. Calculate the expected return/weighted probability of returns on investment X
A
300
Q
  1. Calculate the expected return/weighted probability of returns on investment Y
A
301
Q

Calculate Beta

The market return on both investments is 5.5% and the risk-free rate is 3%. In addition, you have sourced the following investment data.

A

Investment X
B = (3.93% - 3%)/(5.5% - 3%) = 0.93%/2.5% = 0.37 (low sensitivity to market volatility, 63% less volatile than the market)

302
Q

Calculate Beta

The market return on both investments is 5.5% and the risk-free rate is 3%. In addition, you have sourced the following investment data.

A

Investment Y
B = (5.72% - 3%)/(5.5% - 3%) = 2.72%/2.5% = 1.09 (will slightly exaggerate market fluctuations/9% more volatile than the market)

303
Q
  1. Calculate the Alpha on both investments

The market return on both investments is 5.5% and the risk-free rate is 3%. In addition, you have sourced the following

A

Alpha = Actual return – Expected return
Investment X Alpha = 5% - 3.93% = 1.07%

304
Q
  1. Calculate the Alpha on both investments

The market return on both investments is 5.5% and the risk-free rate is 3%. In addition, you have sourced the following

A

Investment Y Alpha = 5.5% - 5.72% = -0.22%

305
Q
  1. Calculate the standard deviation on investments X
A
306
Q
  1. Calculate the standard deviation on investment Y
A
307
Q
  1. Calculate the flat yield on both investments.
A

Flat yield = (Coupon/Price) x 100%
UK Treasury Gilt = (3/97) x 100% = 3.09%
Infinity PLC = (6/102) x 100% = 5.88%

308
Q
  1. Calculate the gross redemption yield on both investments.
A

UK Treasury Gilt = (((£100 - £97)/£97) x 100%)/3 = 3.09%/3 = 1.03% per year
GRY of Treasury Gilt = 3.09% + 1.03% = 4.12%

Infinity PLC = (((£100 - £102)/£102) x 100%)/8 = -1.96%/8 = -0.24% per year
GRY of Treasury Gilt = 5.88% - 0.24% = 5.64%

309
Q
  1. Calculate the modified duration on both investments and comment on the impact of the 2% interest rate increase
A

Modified duration = Macaulay Duration/(1 + GRY)

UK Treasury Gilt = 2.91/(1.0412) = 2.79% (this means that a 1% interest rate increase would have the effect of
reducing the gilt price by £2.79, therefore a 2% increase in interest rates would see this gilt price fall by £5.60).

Infinity PLC = 6.58/(1.0564) = 6.23% (this means that a 1% interest rate increase would have the effect of
reducing the infinity PLC bond price by £6.23, therefore a 2% increase in interest rates would see this bond
price fall by £12.46)

310
Q

What should be included in the client agreement

A
311
Q

Name some hard softs

A
312
Q

Name same soft facts

A
313
Q

what is risk tolerance and how is it assessed?

A
314
Q

Describe capacity for loss

A
315
Q

what is a clients risk profile

A
316
Q

what are the features and limitations of stochastic modelling

A
317
Q

what are the features and limitations of optimisation modelling

A
318
Q

Factors to consider when selecting a fund

A
319
Q

what is passive management

A
320
Q

What is active management

A
321
Q

Describe full replication (passive)

A
322
Q

Describe stratified sampling (passive)

A
323
Q

Describe optimisation (passive)

A
324
Q

Describe synthetic replication (passive)

A
325
Q

Describe negative screening

A
326
Q

Describe positive screening

A
327
Q

Describe positive engagement (ESG)

A
328
Q

describe the advisory method for advice given

A
329
Q

describe the discretionary method for advice give

A
330
Q

what is the purpose of using benchmarks

A
331
Q

what are the limitations of using benchmarks

A
332
Q

what is the purpose of rebalancing

A
333
Q

what are the benefits of rebalancing

A
334
Q

what are the limitations of rebalancing

A
335
Q

factors to consider when rebalancing

A

Asset allocation
Fund opt ions
Frequency of rebalance
Timing of rebalance
Manual or automated rebalancing?
Are investments held on a plat form?
Rebalancing thresholds
Strategic or tactical approach?
Costs/charges associated ( inc. dealing/transaction costs)
Tax implications ( income tax and CGT)
Knowledge and experience
Attitude to risk/capacity for loss
Benchmark used

336
Q

Strategic vs tactical asset allocation

A
337
Q

Mary is considering an investment. She has been told that the Beta for the investment
is 1.2. the available risk-free return is 0.5% and the market return is 4.

  1. Calculate, showing all your workings, the return that she should expect for her
    investment
A

► ER = Rf + (B x (Rm - Rf))
► ER = 0.5 + (1.2 x (4 – 0.5))
► ER = 0.5 + (1.2 x 3.5)
► ER = 0.5 + 4.2
► ER = 4.7

338
Q

Mary is considering an investment. She has been told that the Beta for the investment
is 1.2. the available risk-free return is 0.5% and the market return is 4.

  1. Outline the main assumptions made by CAPM
A

► All investments have the same term
► Risk is the only factor in the investor making investment decisions
► There are no liquidity problems, there are many buyers and sellers in the market and
so it will always be possible to find a willing buyer without delay.
► Nothing is hidden from the investor, the market is open and transparent and all
investors have the same level of information at their fingertips
► The risk-free return is freely available to investors
► There are no costs involved in buying or selling, nor will taxes apply

339
Q

Mary is considering an investment. She has been told that the Beta for the investment
is 1.2. the available risk-free return is 0.5% and the market return is 4.

  1. What are the main limitations of CAPM?
A

► In reality the risk-free return is NOT always available.
► To counter this, the return on government treasury bills can be used used
► It is hard to accurately determine the best market portfolio to produce the
representative market return
► Betas are based on past performance which is not a perfect measure.

340
Q

Outline the three levels of the efficient market hypothesis

A

► Weak:
► Assumes that all past price and trading information is available to everyone
► Given that it is available, it is already taken account of in the price
► No outperformance will be possible by using this information
► This level seems to be supported by empirical evidence

► Semi-strong:
► Goes further than the weak version
► Argues that all information which is in the public domain is already taken into
account in the price and that this happens soon after the information becomes
available
► Available information would include any financial information published by a
company such as annual report and accounts, profit statements etc.
► No outperformance should be possible from the use of this information.
► The research evidence is less conclusive here, though it would seem that this holds
true for most markets.

► Strong:
► Takes the theory to the end conclusion
► Argues that price includes all information that could be obtained – not just the
financial and trading information but also private information such as that which can be
obtained from interviewing company directors or their advisers.
► This level is less supported by research.
► Much information might be available to the largest institutional investment but is not
available to most investors and so will not necessarily be taken into account

341
Q

Graham is considering two very different investment approaches for his recent
inheritance. He has heard conflicting arguments and is now totally confused. The two possible approaches are:

► Passive investment using a range of tracker funds
► Active management using a DFM

  1. Briefly outline the four main ways in which a tracker fund can track an index and
    state an advantage and disadvantage of each
A

► Full replication – all the components of the index being tracked are held in the same
proportionate weight as the index itself
Has a low ‘tracking error’
But will involve transaction costs, custodian costs etc

► Optimisation – not all the holdings are purchased, but enough to give a good track
with minimised tracking error
Better for smaller funds, lower costs
Higher tracking error, risk of more volatility

► Synthetic – using only derivatives and not holding any actual physical stock
Low costs
No income stream

► Blended – a mix of the above designed to achieve the best overall return – so
perhaps an optimised approach, combined with synthetic coverage of the reset of the
market
Controlled costs / best of both worlds
More complicated for customers to understand.

342
Q

Graham is considering two very different investment approaches for his recent
inheritance. He has heard conflicting arguments and is now totally confused. The two possible approaches are:

► Passive investment using a range of tracker funds
► Active management using a DFM

  1. Outline the costs associated with DFM
A

► Dealing commission / bid-offer spread on funds
► Fund ongoing charges
► PTM levy
► Stamp duty / Stamp duty reserve tax
► Custodian / platform and wrapper fees
► DFM own annual management charge
► Initial set-up fees
► Possible charges attached to ad hoc valuations and other services requested by the
client.

343
Q

Graham is considering two very different investment approaches for his recent
inheritance. He has heard conflicting arguments and is now totally confused. The two possible approaches are:

► Passive investment using a range of tracker funds
► Active management using a DFM

  1. Outline the relative benefits of tracker funds and DFM
A

► Cheaper than active management
► Most fund managers don’t outperform the index so return should be as good if not
better than under alternative arrangements
► Weighted trackers can be used to take out bias toward largest market capitalisation
► Diversification can be achieved through the use of multiple tracker funds tracking
different indices
Advantages of DFM
► Access to a specialist fund manager with expertise in given area
► Ability to respond quickly to changes by buying and selling without shares
► Can outperform the index
► Can take account of any special requirements of the investor – such as ethical
concerns
► Allows for bespoke asset allocation

344
Q

Give an example of anchoring

A
345
Q

Give an example of the endowment effect?

A
346
Q

give an example of herd mentality

A
347
Q

give an example of hindsight when looking at behavioral science

A
348
Q

Give an example of loss aversion

A
349
Q

Give an example of mental accounting

A
350
Q

Give an example of overconfidence

A
351
Q

Give an example of regret aversion

A
352
Q

What is ESG Impact investing

A
353
Q

what is negative screening

A
354
Q

what is positive screening

A
355
Q

what is sharia compliant investing

A
356
Q

What does ESG stand for and what does each element represent

A
357
Q

What are the benefits of thematic investing

A
358
Q

What are the risks of thematic investing

A
359
Q

What will influence suitability of thematic investment*

A

Investment objectives/timescales
Attitude to risk
Capacity for loss
Investment experience (especially in this specific area)
Amount available for investment (could be higher minimum investment levels on
specialist funds)
Investment preferences/ethical views and beliefs – and the conviction behind these
Other investments/level of diversification
Views on costs and charges

360
Q
A

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