R02 Flashcards

1
Q

Cash investments accounts

A

Cash is liquid, no capital appreciation - pays interest

Fixed term accounts - leave in there for 1-2 years and offer fixed rate of return

Notice accounts - have to give 30-60 days notice before withdrawal

Structured deposits - pay interest based on performance of an index and will pay capital return on maturity ‘guaranteed investment account’

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2
Q

Cash and ns&i

A

Cash can be held in ns&I for tax free investments think PICK

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3
Q

Money as an investment

A

Treasury bills - short term money market instrument managed by DMO

Used by government to raise cash- they don’t pay interest but bills issued are at below par and redeemed at face value

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4
Q

Money market funds

A

Two types of money market funds

Short term - weighted average maturity of no more than 60 days and weighted average life of no more than 120 days

Standard term funds - weighted average maturity of no more than 6 months and a weighted average maturity of no more than 12 months

Can invest in a combination of cash, cash deposit/Treasury bills

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5
Q

Fixed interest securities

A

Long term investment between 2-30 yrs: a loan from the investor and pay return for having access to capital

All share the same characteristics
Fixed redemption value, repaid after set period, set return known as coupon

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6
Q

Risks associated with fixed interest securities

A

There is an inverse relationship between the price of the bind and interest rates

Main risks associated with bonds:

Commercial/specific - risk for indiv issues

Market/systematic - risk to asset class as a whole

Liquidity risk - some bonds can be hard to sell

Default risk - chance a issuer cannot pay the interest or capital back

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7
Q

Bond volatility

A

Bonds with lower coupons and longer redemption periods are more volatile because coupon payments exposed to movements in interest rates for longer periods

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8
Q

Gilts and classification

A

They are classified by there time to redemption

Shorts DMO less than 7yrs
Shorts financial press less than 5yrs
Mediums DMO 7-15yrs
Mediums financial press 5-15yrs
Longs over 15yrs
Undated - ni specific redemption date

Undated gilts work like other but with one difference -
if gilt issues before 2005: the value of rpi is taken 8 months prior to each payment date
If issued post Sept 2005 then it is taken 3 months prior

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9
Q

Repo and repo rate

A

The amount paid to the investor investing in GILTS essentially the rate of interest paid

The repo rate is used by the BoE to help set interest rates

To help increase liquidity the repo was created (sale and repurchase) - sold from one to another with promise to buy back at future date and price

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10
Q

Tax on GILTS

A

Cgt Free but fully liabke to income tax

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11
Q

Strips market

A

For the fixed interest market to help makes gilts more liquid

Separated out the coupons and redemption value and both are sold separately.

Strips do not pay interest instead investors receive face value on maturity - prior to this they would trade at discount

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12
Q

Corporate bonds - loans to companies

A

Risk - greater chance of default - larger to company lower the risk

It is an alternative for companies to raise capital than going to the bank

Where a secured loan uses assets as fall back this is known as a debenture

Another type of bond is a convertible bond - option to revert to shares, these bonds trade at a premium if share price doing well and vice versa

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13
Q

Permanent interest bearing shares (PIBS) and Perpetual subordinated Bond (PSB)

A

Offered by building societies and traded on stock market, no longer available, where building society demutualises a PIBS becomes a PBS

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14
Q

Trading fixed interest securities

A

Bond trading at par it is trading at nominal value - where above nominal value this is above par and below, below par

Clean prices - the quoted mid market price - price between buying and selling and do not include interest accrued

Interest is paid twice yearly and where a bond is sold the timing of the next payment determines the position

Cum (with) dividend - the purchaser receives full interest even tho the bind has not been held for 6 months, to compensate the buyer will pay clean price plus an amount of interest, typically paid 1 working day after purchase

Ex (without) dividend - where bond is sold within 7 days of next coupon payments the seller will receive full coupon payments, to compensate the price paid will be adjusted

The actually price paid is the ‘dirty’ price

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15
Q

The bonds market

A

Primary market - where initial sale takes place, DMO issue gilts weekly via auction. Noy usually possible for indiv investors to take part. If they do they put a bid in and if successful pay average of bid prices. For large inv they bid prices and if successful pay the bid price

Secondary market - where stock are traded, each company has a credit rating via standard & poors and Moody’s - e.g. AAA anything below BBB is a sub investment grade bond

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16
Q

Bond yields

A

Running yields - what return is it currently offering (interest yield) -

coupon/clean price X 100

Redemption yield - works out gain or loss at maturity as a % of current price. Measure of performance of held to maturity

((Nominal price - clean price)/clean price) x 100%

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17
Q

Equity and shares

A

This is part owning the capital of a company, there’s a primary and secondary market for shares

The main market - company is listed and is listed to the public in the main market i.e LSE - there are a lot of requirements for this

The alternative investment market - regulated by LSE - for smaller firms with lower barriers to entry

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18
Q

Types of shares

A

Ordinary shares - tank behind preference shares in receiving dividends

Preference shares - fixed rate of return similar to bonds - hey rank higher in event company went bust.

Different type of preference shares:

Cumulative - if payment missed paid back in times if higher profit
No cumulative - not clawed back
Participating- as well as fixed div, share if wider profits in good yrs
Redeemable - firm can buy back shares where desired
Convertible - convert to ordinary

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19
Q

Cost of buying and selling shares

A

Commission to dealer, stamp duty it SDRT

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20
Q

Risks of investing in equities

A

Volatility of dividends, capital loss, third party failure, currency risk, liquidity risk, regulator risk

Important to diversify- invest in different shares, industries, geography

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21
Q

Earning per share

A

Remember it is profit after Corp tax, minority interest and pref shareholders

Profit to ordinary shareholders / number of ordinary shares in issue

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22
Q

Price/earnings ratio (P/E)

A

How the company is valued

Current share price / earnings per share

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23
Q

Dividend per share

A

Return received from share on annual income

(dividend per share / current share price) x 100

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24
Q

Dividend covers

A

How many times dividend paid out from periods of profit

Earnings per share / dividends per share

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25
Q

Net asset value

A

Value of a company

Net asset attributable to ordinary shareholders / number of ordinary shares in issue

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26
Q

Liquidity

A

Business ability to meet debt

Current assets - stock / liabilities

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27
Q

Gearing

A

Measure of borrowing

Long term debt / shareholders funds

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28
Q

Grouping and watching equity indicies

A

Allows investors to see movement in markets as a whole. Problem is weighted to market capitalisation, large companies have heavy impact on effect of indicies

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29
Q

Property

A

Very illiquid, needs to be managed, void periods, increased tax

Stamp duty lank tax due 14 days after transaction has taken place

Renting out part of your home
7500 household relief
Property income allowance - no tax is income less than 1k

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30
Q

Property rental yields

A

Rent per month x 12 / cost on property x 100

True rental yields

Rent per month - monthly fees x 12 / cost of property + SDLT + solicitor fees x 100

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31
Q

Alternative investments

A

Works of art, collectables

Commodities
Hard - mined stuff, gold, oil, gas
Soft - grown stuff, coffee, wheat

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32
Q

Quantitative easing

A

Print money to stimulate economy

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33
Q

What is the interest rate target

A

2%

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34
Q

Impact of trends on macro economic environment

A

Trends have a big impact, investors stop looking at fundamentals and follow trends which inflates price creating a bubble…

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35
Q

Political impact on economy

A

American sneeze what happens in America then follow worldwide
The human factor - aging population

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36
Q

The economic cycle

A

Expansion: strong demand for goods, growth in sales and profitability, demand starts to overtake supply, prices start to rise (inflation) economy starts to overheat and interest rates start to rise

Boom: highest point in cycle, economy growing at its fastest, interest rates increase again, demand will start to fall

Slowdown/contraction: inflation could still be high as demand starts to fall, business sales start to decrease and unemployment starts to rise, interest rates start to fall

Recession: seceerve economic downturn, profits are weak, people aren’t spending as much, inflation falls, interest rates fall

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37
Q

Gross domestic product GDP

A

Common way to illustrate how an economy is doing, one quarter economy shrinks is known as a contraction, two successive is a recession

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38
Q

Public sector net cash requirement

A

What comes in and out of a countries economy - is there more coming in than out, if there is a recession the PSNCR will grow and vice versa

How much cash is needed to function

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39
Q

How does the economic cycle effect our investment decisions

A

Fixed interest - inverse relationship with interest rates and inflation

Equities - inflation high, equities to well as more people buying and vice versa

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40
Q

Government policies and the economic cycle

A

Fiscal policies - government spending more of cutting tax in times of economic downturn. Gov increase tax and decrease spending in times of boom

Gov Spending money will have more impact then cutting tax rates… Gov spending goes in economy whereas cutting tax people could save it…

Monetary policies - controlling interest rates

Easing monetary policy - short term reduction in interest rates followed by long term
Tightening - opposite of above

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41
Q

What is SONIA

A

the rate at which banks lend to each other and the rate in which they do

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42
Q

Money supply - how.mich money there is in the economy

A

2 common measures

M0 - notes and coins plus banks operational money held with BoE - this shows stonf consumer spending and retail sales

M4 - inc all deposits created from lending banks plus money held by savers and banks and coins - suggests more lending is taking place

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43
Q

How can central banks influence the amount of money in the economy

A

Buying and selling bonds

Selling bonds reduces amount of money as people invest

Buying increases amount as it puts more money in ppls hands

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44
Q

Inflation

A

This is the price of goods and services on a month to month basis

There are a number of ways this can be measured

Retail price index - used for index linked Gilts

Consumer price index - allows comparison across European counties

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45
Q

Types of inflation

A

Disinflstion - where inflation rises at a slower rate then they have been

Deflation - where prices actually start to fall

Stagflation - inflation is high but growth is flat

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46
Q

Exchange rates

A

Based on supply and demand - where a country is producing goods, people need their currency to buy it, increase demand increase price… It strengthens the currency against other currencies

Equally if interest rates in a country are high, people will want to invest in cash deposits in that country, increasing demand for currency

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47
Q

Real exchange rates

A

Allows us to measure how competitive one country is compared to another accounting for inflation

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48
Q

Balance of payment

A

Money in vs money out of a economy, deficit shows more money going out, surplus shows more money coming in

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49
Q

Capital account

A

Measures financial flows and investment in and out if an economy

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50
Q

Major investment theories - modern portfolio theory

A

Modern portfolio theory - diversification

Standard deviation - the extent the return varies from the expected return. A higher SD would indicate more volatility

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51
Q

Reducing risk with MPT

A

By holding different investments within a portfolio will reduce the risk, it is important to consider the correlation between the assets to see how diversified the portfolio is

Correlation can be measured on a scale from +1 to -1

Positive correlation if one stock moves 10% the over moves 10% in the same direction

Negative correlation if one moves up 10% the other moves down 10%

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52
Q

Options and futures

A

Options - gives option to sell but do not have to if don’t want to (it can expire)

Futures - have to sell at agreed price

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53
Q

Efficient Frontier

A

Represents the best return for the risk taken, an investor would not vary from this as it would mean taking extra unneeded risk

Think of the graph in your head now

54
Q

Shortcomings of SD

A

Not a precise tool, relies on past performance, doesn’t include costs or charges, assumes portfolio made up of index funds

55
Q

Different type of risks for shares

A

Systematic (market risk)
Non systematic risk (specific risk)

56
Q

Capital asset pricing model - CAPM

A

Considers the risk free return plus extra return for additional risk taken, the measure of systematic risk is known as beta

The non systematic risk is ignored as it is diversified away

57
Q

The market and it’s relationship with BETA

A

The market always has a beta of 1, a beta of 1 means the security will move exactly like the market does

A beta below 1 but above 0 means the security will move at a slower rate e.g. if beta was 0.5 if the market moves by 10% the security will move by 5%

A beta of above 1 would move the security would move up and down at a higher rate then the market e.g. a beta of 1.5 would mean if the market moves 10% the security move 15%

58
Q

CAPM equation

A

Risk free return + Beta x (market return - risk free return)

The model assumes: same holding periods rational, rf rate is available, open market

59
Q

CAPM is a singular factor model
There are multi factor models

A
60
Q

Efficient market hypothesis

A

How markets act based on information

Weak form - all info inc in price, no outperformance possible
Semi-strong - any info in public domain is inc in price
Strong- price inc all info not just financial info but also private info

61
Q

Time value of money equations

A

PV = amount x (1+r)N
FV = amount / (1+r)N

Working out rate of return

FV/PV then number of years square root ans

Changing interest rates part way through

FV = PV(1+(r/n))N1 X (1+r)N3

Interest paid at different intervals i.e more than annually

EAR (1+(R/N))N -1

Regular premiums

FV= P {(1+R)N - 1 /R}

62
Q

What are the risks in investing

A

Credit risk - impact bonds
Default risk
Downgrade risk- bonds rank more riskier, prices decrease
Currency risk
Bail in risk
Event risk
Political risk
Liquidity risk

63
Q

RPI included increases in interest unless it is stated as RPIX
There is an international RPI known as RPIJ

A
64
Q

What is generally always higher RPI or CPI

A

RPI

65
Q

Collective investments

A

Unit trusts and OEICS open ended investments

66
Q

The fca regulates collective investments

A

Collective investments categorized into the following categories:

UK UCITs (comply and can be sold to retail investors)
UK non UCITs (do not comply but can be sold to uo retail investors)
Qualified investments schemes (not to be marketed to anyone other than pro or sophisticated investors)

67
Q

UK collectives diversification rules

A

Portfolio must not hold more than 10% of a stock and no more than 4 x 10%, rest have to be less than 5%

No more than 20% in one group of companies

Funds holding more than 35% in gov fixed interest must have least 6 different issues if that stock, no more than 30% in fund
10% can be held in unlisted UCITs and 20% for non-UCITSs

68
Q

Borrowing / gearing for collectives

A

UCITs are not permitted to borrow to gear up, they can borrow up to 10% in the short term to cover payments such as dividends so they do not have to sell assets

69
Q

UCIS collectives

A

Unauthorized un regulated schemes known as UCIS - not authorized by fca and can only be taken out by high net worth and sophisticated investors

70
Q

Unit trusts

A

Are actually a trust.

Trustee - typically bank/building society; responsibility inc: monitor, manage, set up, hold up to date, ensure assets invested as per objectives

The trust deed - legally binding, strategy, aims/objectives, limitations

Unit trust manager - manage assets in accordance with regulation and trust deed, invest in the funds, sufficient resource to operate, keep register of units issued, inform of any breaches

Unit trusts are open ended

71
Q

Pricing and valuing unit trusts

A

Pricing on unit trusts - offer price is the price the manager offers units to investors at. The bid price is the investors selling price. The difference is the charge to investor.

Valuing funds -
Forward pricing - setting price at the next valuation point, if the fund has moved more than 2% since the last valuation the manager must move to forward pricing - pay price at next valuation point
Historic pricing- set price at last valuation point

72
Q

Structure of OIECs

A

Very similar to unit trusts but they are structured as a company, depositary owns assets, auth company director performs same tile as manager

73
Q

Accessing unit trusts and OEICs

A

Many different types of management available:

Multimanager products- hold broad range of assets through:

Funds of funds: a fund that invests in other funds
Manager of managers funds: different fund managers liik after different part of the investment they specialize in

74
Q

Offshore funds

A

Gross roll up
Tax treatment, reporting and non reporting

75
Q

Automatic exchange of information

A

Stops tax havens, government communicate

76
Q

Investment trusts

A

Closed ended investments - trading at net asset value, can trade at discount or premium, if all those who sell cal this is known as diluted nav. If not it is known as undiluted nav

77
Q

Structure of investment trusts

A

Two primary capital structures:

Standard or conventional - one class of shares under which the investor gets any income or gains produced

Split capital - inv trusts with limited lifespans and different shares classes, distributed differently

78
Q

What is an investment trust Warrant?

A

Right to buy shares at a set price at a set point in time

79
Q

Investment trust - Share buy back

A

As Investment trusts are closed ended, supply and demand can be limited so 10% shares can be hold as buy back to control S&D

80
Q

Investment trust and gearing

A

Borrowing to invest, investors can benefit from the growth on the borrowing

81
Q

Investment trust can be held y retail investors in ISAs

A
82
Q

Life assurance products

A

With-profits : smooths out the investment
Unit-linked : policy holder given units in a fund

Regular premiums contracts- qualifying and non qualifying

Lumo sum contracts non-qual example: guaranteed income, growth bonds, unit linked bonds, dist bonds

Tax on onshore life contracts- 20% paid in fund rest tax on indiv as appropriate…

Non qualifying and qual can 5% unral investment withfre tax differed

83
Q

Pound cost averaging

A

Problem with unit linked - if invest at bad time… Pound cost averaging averages out timing to market

84
Q

Top slicing

A
85
Q

Traded endowment policies

A

Some policies especially with profit may not be needed, and do not want to surrender to lose bonus, can sell one second hand market, the buyer will pay cgt on payment price and premiums paid take sale price

86
Q

Friendly society policies

A
87
Q

Offshore bonds

A

Gross role up, there is time appointment relief
Equation - number of days UK resident - number says policy ran, x answer by chargeable gain

Offshore bonds, personal portfolio bind charges 15% tax

88
Q

Bonds and child benefits

A

If between 50 and 60k reduced

89
Q

Bonds and trusts

A

25% tax liability if settlor pays into trust

90
Q

Exchanged traded fund

A

Index tracking funds listed on the stock exchange, do not own stock but track indicies through derivatives

91
Q

Property based investments

A

Listed priority companies - investors but shares in a portfolio that comprises I’d property

Property authorized investment fund PAIF - example of OIC fund

Tax on the investor - income paid net 20%

To qualify: 60% income must come from property element
No investor hold more than 10%

Real estate investment trust REIT

Closed ended companies listed on recognized stick exchange
To qualify: 75% profit come from profit, 90% paid to shareholders, borrowing covered 125% rental
Remember non property = div
Property = interest

92
Q

Private equity

A

Eis
Seis
Vct

93
Q

Isa’s

A

ISA
LIFETIME ISA
HELP TO BUY
CTF
JUNIOR ISA

94
Q

Stakeholder product rules

A

Can be sold via simplify advice process

95
Q

Derivatives and how can they be used

A

Where agreed directly between 2 parties known as over the counter

How can derivatives be used?
To hedge future prices
To hedge a portfolio
Achieve different asset allocation
Speculation

No cgt for derivatives in GILTs or Corp bonds

96
Q

Derivatives: futures

A

Legally binding for one party to sell and one to buy, buyer holds ‘long’ position, seller has ‘short’ position - most do not actually involve a transfer just the margin

Where exchange does take place it is called - exchange delivery settlement price ‘EDSP

97
Q

Derivatives - options

A

Options: do not have obligation but have the option to sell, if do not exercise option it expires, can sell prior to expirer date, an option price is known as the ‘strike price’ a call option is the right to buy, a put option is the exercise the right to sell

98
Q

Hedge funds

A

Higher charges
Cayman Islands

99
Q

Absolute fund returns

A

Rely on skill if the manager to achieve positive return in all market conditions

100
Q

Structured products

A

Offer 100% capital protection

101
Q

Investment advice process

A

Consider: need = want - got

6 step process.

1- establishing and defining the client and personal financial planner relationship
2- gather client data and determining goals and expectations
3- analysing and evaluation the clients financial status
4- developing and presenting the financial plan
5- implementing the financial plan and recommendations
6- monitor the plan and relationship

102
Q

Investment planning principles

A

Scientific/theoretical approach- highest return on line with risk profile, MPT, efficient Frontier

Pragmatic approach - ignores all mathematical theory that underpins MPY and uses what has happened in the past in combination with the thoughts of the adviser on what will happen in the future

Stochastic profiling approach - uses complex.mathematics moddelled by actuaries - example returns between 5-15% or -5 - 20%

103
Q

How to construct a portfolio

A

Top down - asset allocation, geography, industry, stock

Bottom up - picking stocks to build up the portfolio

104
Q

Different fund managers styles

A

Employ different styles of stock selection

Value, growth at a reasonable price (GARP), contrarianism - what has the market missed, momentum

105
Q

Selecting a fund manager

A

Think about the: objective of the fund, costs and charges, the group fund, risk, the fund manager , performance

106
Q

Economic,social, governance when picking stock

A

Economic - waste, pollution
Social - diversity of workforce
Governance - bond, corruption

There is positive and negative screening, positive good

107
Q

Active vs passive funds

A

Passive - use the fund to track the market
Active - actively seek to outperform the benchmark

108
Q

Selecting an investment wrapper

A

Pension, isa, collective funds, onshore vs offshore, vct, eis, seis

109
Q

Attitude for risk vs capacity for loss

A

Attitude for risk- how someone feels about risk
Capacity for loss- how much someone can actually afford to lose

110
Q

Holding period return

A

Value at the start and end and any money paid out between start and end as a % of value at start

R = D + (V1-V0)/V0

111
Q

Money weighted rate of return

A

Takes into consideration money paid in or taken out

D + (V1-V0) - C / V0 + (C x n/12)

112
Q

Time weighted rate of return

A

Breaks down returns in a set period

(V1/V0 x V2/(V1+c)) -1

113
Q

The sharoe ratio

A

Measures excess return over risk free rate of each unit of risk taken

Return on investment - risk free return / Stand deviation of the return of the investment

114
Q

Information ratio

A

Looks at consistency of performance against the benchmark: shows.effectiveness of the fund manager over passive funds

Rp- Rb / tracking error

115
Q

Alpha

A

The actually performance, the performance difference from expected Beta

Actual portfolio performance - (Rf + B(Rm-Rf))

116
Q

Benchmarking

A

Limitations to benchmarking when comparing fund manager performance to benchmark of indicies, as they only reflect movement in capital value, no accounting for cash balancing, weighting cap can cause distortion

117
Q

Selecting a fund manager

A

Performance, risk, size, experience, ESG, charges, staff turnover

118
Q

Portfolio reviews

A

Changes in tax, regulation, personal situation, any changes in strategy, details of holdings

119
Q

How many good and serviced make up the CPI measure if inflation in the uk

A

700

120
Q

IT - what is it?

A

Information ratio, how well a investor performs, higher it the better against benchmark

121
Q

Derivatives are financial contracts whose value is derived from, at least in part from what?

A

The underlying asset

122
Q

What % of a unitsl trusts assets must be held in UK equities with the primary objective of achieving capital growth?

A

80%

123
Q

ISA

A

You can now withdraw and reinvest

124
Q

Who owns the assets of a unit trust

A

The trustee

125
Q

What does the European savings directive achieve

A

Sharing of information regarding income payments to EU residents

126
Q

What is the isa minimum deposit

A

£10

127
Q

A put option gives the investor the right to

A

Sell within a specified period at a predetermined price

128
Q

The depositary in a OEIC is the equivalent role to a trustee of a unit trust

A
129
Q

What rights do investors have when purchasing an option contract

A

The right but not the obligation, to buy or sell copper in the future

130
Q

What name is used for portfolios that use combined active and passive techniques

A

Core-satellite management

131
Q

Time weighted rate of return Vs money weighted rate of return

A

Time weighted rate of return allows comparisons to be made of the performance of one fund manager with another

Money weighted rate of return measures the overall return in capital invested over a specific period

132
Q

Client objectives and their individual constraints on how their portfolio will be managed are set out in what document

A

The investor policy statement