R02 Flashcards
Can listed private equity investment company can be held in an ISA?
Yes
Which index is not weighted according to market index?
Nikkei 225
What type of rent period should a B2L landlord obtain?
there is no minimum period but she should avoid long rental agreements so as not to depress the property value.
What is Disinflation?
Disinflation occurs when there is a decrease rate of inflation. The price of goods are still increasing but at a slower rate
What is Deflation?
The prices of goods start to decrease over time and the inflation rate becomes negative
What is Stagflation?
Stagflation is a combination of stagnant growth and inflation.
What is the Balance of payments when dealing with imports and exports of goods and services? (current/capital account)
Current account
What is the Balance of payments when dealing with foreign investments in the UK and UK investments? (current/capital account)
Capital Account
Fama & French model takes into account
company size and value
According to the efficient market hypothesis, the most efficient market is high or low risk?
Low
According to the efficient market hypothesis, the Least efficient market is high or low risk?
High
Which is most vulnerable to liquidity risk? (Unlisted shares/Real estate investment trusts [REITs])
Unlisted shares
What additional reporting is a reporting fund obliged to make compared to a non-reporting fund?
All income must be reported to HM Revenue and Customs
Relative value funds are best described as:
Often referred to as adopting ‘market neutral’ strategies because there is no market-related element in returns. The manager relies on arbitrage to produce returns
Long/short funds are best described as:
Long/short funds invest in equity bond instruments and combine long investments with short sales of individual securities and derivatives to reduce market exposure.
Event driven funds
use the price movements arising from anticipated corporate events to achieve their returns.
What is the Theoretical approach to asset allocation?
it uses mathematical analysis and techniques with the aim of obtaining the desired risk rate return
What is the pragmatic approach to asset allocation?
Recognised the reduction in risk that resulted from owning different asset allocation
A structured product offers a return in excess to 100% of the FTSE 100 Index over a period of five years, or full return of capital if the index is lower at redemption. What type of protection is this known as?
Hard protection
A structured product offers a return Below 100% of the FTSE 100 Index over a period of five years, or full return of capital if the index is lower at redemption. What type of protection is this known as?
Soft Protection
Onshore investment bonds are likely to be relatively more attractive to: (what type of taxpayer?) and (target of investments (growth or income))
higher-rate taxpayers where the underlying investments generate income rather than capital growth.
PQR Plc has issued commercial bills. This is most likely to help the company:
fund their day-to-day cash flows
What is the stamp duty rate using a stock transfer form?
0.5%
What are examples of hard commodities?
gold, crude oil and natural gas
What are examples of soft commodities?
coco and wheat
A country has witnessed a rapid growth in the amount of money circulating in the economy, as measured by M4. This is a sign that:
inflationary pressures are building up
According to the Fama and French multi-factor model, it is likely that:
small cap stocks will outperform large cap stocks.
If a fund of funds is described as ‘fettered’, what restriction is imposed on it?
It may only invest in funds run by the same management group.
What is the total allowance for a friendly society? (annual/monthly basis)
Annual basis: £270 per year
Monthly basis: £300 per year
Difference between ETF & ETN?
ETFs hold a portfolio of actual investments
Property funds may only be held within an ISA if:
they do not restrict the investors’ ability to access their funds
How are REIT’s taxed?
one element paid net of 20% tax and non tax payers can reclaim and one element paid with no tax deducted.
Modern portfolio theory compares what with what?
expected returns with expected volatility
The effectiveness of modern portfolio theory has been severely criticised in recent years. What is considered to be its main weakness?
Its probabilistic techniques are less effective in times of economic crises
You should be aware that ongoing charges figure [OCF]
does not take into account dealing costs
What is downgrade risk?
The risk that the market anticipates that a credit rating agency is going to downgrade a bond
What is credit spread risk?
corporate bonds will underperform gilts resulting in a widening of credit
what is the difference between default risk vs counterparty risk?
default risk - risk issuer will default on their obligations to pay interest and the capital on maturity
Counterparty risk - The risk that a counterparty will not pay what it is obliged to on a bond, derivative trade or other transaction
Responsibilities of trustees of a unit trust do not include:
selecting investments
offshore reporting fund are subject to what tax?
capital profits are potentially subject to capital gains tax
A hedge fund which relies on arbitrage to produce returns is known as which type of fund?
Relative value
What is the difference between a future and an option?
Future - a right and an obligation to buy or sell an underlying stock
Option - a right without an obligation to buy or sell equity or index
What is the difference between strategic and tactical asset allocation?
Strategic - asset allocation is fopr the long yerm and will only be adjusted in extreme conditions or if the clients circumstances change.
Tactical having asset allocation models that give a range for the percentage of capital in each asset class.
Short term money market fund can have a weighted average maturity of no more than ___ days?
60 days
What is the FTSE 100 arithmetically weighted based on?
The market capitalisation of each company
What does a rising Public sector net cash requirement (PSNCR) indicate?
Difference between the government revenue and expenditure. Therefore when it rises the economy is in a recession
The crux of the Efficient market hypothesis (EMH) is that:
It should be impossible to achieve higher returns than average market returns through stock selection or market timing
within a spilt capital investment trust the “hurdle rate” is an indication of the:
annual growth rate investments must achieve to pay the current purchase price, the predetermined redemption value, or the value at wind up
What part of the risk profile assessment can be considered objectively by a client?
capacity for loss
when a portfolio is being arranged to meet more than one objective and a client has different attitudes to risk for each objective, this is known as:
mental accounting
What is the least complex method of producing a portfolio based on asset allocation
Historic
On what basis does a gilt pay its interest?
Bi-Annually
What is the difference between interest yield and redemption Yield?
Redemption yield takes into account gains/losses held to maturity
It should be noted about what regarding NS&I certificates
They are only available for existing customers
What is the name for a residential property given leases of 6-12 month tenancy?
Assured shorthold lease
UK’s balance of payments, Current account which consists of transactions for:
imports/exports of goods and services
UK’s balance of payments, Capital Account which consists of transactions for:
investment movements
The efficient frontier model claims that rational investors tend to choose portfolios that:
generate the maximum possible return with the least amount of risk
an investor who uses arbitrage pricing theory hopes to:
identify shares that are mispriced in the market
Behavioural finance prospect theory is the idea that:
people do not always act rationally when facing a loss or profit
what kind of ___ risk a government stepping into financial institutions in trouble the help comes from the institution shareholders
bail-in risk
Do corporate bonds pay tax on interest?
yes
Milly bought unlisted shares in a save as you earn scheme. how long does she have to invest in an ISA for them to be treated as an eligible investment?
90 days
the main source of income from a sharia-compliant Liarah fund is:
rent
The finance theory framework does not take into account:
risk is a psychological/subjective issue which framework does not take into account of
The term mental accounting refers to a client who
has a different attitude to risk in respect of different objectives
performance fees are permitted for funds which
exceed a threshold as outlined in their terms and conditions
What does dividend cover measure?
How many times the dividend could be paid out of the available current earnings. This indicates the riskiness of the investment and the margin of safety has in paying dividends.
What is the difference between APR and AER?
APR is generally used for loans whereas AER applies to deposits
Treasury bills are managed by:
the debt management office (DMO)
What is the difference between diluted & undiluted NAV?
Diluted NAV assumes that all the outstanding warrants and convertible loan stocks are exercised - Undiluted NAV figure ignores this
What are investment notes?
Are structured products that once issued are listed on the London Stock exchange
What do investors expect regarding normal yield curve and returns?
They expect higher yields for holding longer-term bonds
What do investors expect regarding flat yield curve and returns?
investors expect lower yield and pay relatively more for longer-dated bond
What do investors expect regarding inverted yield curve and returns?
yield on longer term bonds is less than on short term bonds - under the assumptions, short term interest rates are expected to rise and fall in the longer term
How many years defines a short term gilt? DMO: Financial press definition:
DMO: >7 years
Financial press definition: >5 years
How many years defines a medium term gilt? DMO: Financial press definition:
DMO: 7 years - 15 years
Financial press definition: 5 years - 15 years
How many years defines a Long term gilt? DMO: Financial press definition:
DMO: <15 years
Financial press definition: <15 years
Explain Modern portfolio theory?
concerned about the way portfolios are constructed to maximise returns and minimise risks
Assumption investors are risk adverese and would choose less risky investment if they offered the same return
What does the efficient frontier show?
It plots the risk reward profiles and shows the best return that can be expected for a given level of risk
What are the limitations regarding the efficient frontier?
- assumes standard deviation is the correct level of risk
- investors are concerned about other factors
- inputs rely on historical data
- Assumes all underly funds are fund funds
What type of risk can be eliminated by holding a diversified portfolio? (how many securities do you need to achieve this?)
Non-systematic risk
- 15- 20 securities
What does the capital asset pricing model (CAPM) say?
because non-systematic risk can be eliminated by diversification it is not rewarded.
What is the main difference between CAPM and APT?
APT is based on the belief that asset prices are determined by more than just one type of market risk. unlike CAPM
The Efficient Market hypothesis assumes?
that all prices reflect all available information is accessible and are the correct price
What is a debenture?
Is a secured loan agreement between a lender and a borrower with business assets used as security.
What is a convertible bond?
Bond that offers the option of converting the bond into ordinary shares of the issuing shares.
What is the difference between tactical and strategic asset management?
Tactical - Making adjustments to the asset management in the short term
Strategic - Making adjustments in the long term approach
What is a pragmatic approach to investing?
forward-looking judgments of likely returns and volatility to determine portfolio weighting
What is a theoretical approach to asset allocation?
Using mathematical analysis and techniques with the aim of obtaining the desired risk-return trade-off for the return and level of risk.
What is the difference between an American and European style option?
European - can only be exercised at expiry
American - can be exercised at any time during its life
Regarding options: What is the difference between intrinsic and time value?
Intrinsic - value above the final expiry option
Time value - Above that of the intrinsic value as they believe it is worth more
Explain the long/short funds hedge fund investment strategy:
an approach that operates a bias towards either the long term or short term side or balance between the two for a market neutral approach
Explain the relative value funds hedge fund investment strategy:
managers rely on arbitrage to produce returns by identifying and exploiting pricing anomalies between similar investments or combinations of investments. - often referred to as adopting a market neutral
Explain the Event driven funds hedge fund investment strategy:
using price movements airing from anticipated corporate events to achieve their returns
Explain the Tactical trading funds hedge fund investment strategy:
They trade in currencies, bonds equities, and commodities. in each asset class the use long/short approach - most closely match the public’s perception of hedgefund.
What is the objectives of absolute return funds?
Aim to achieve a positive absolute return for investors in all market conditions.
If someone dies with an ISA income and gains will remain tax-free until:
earlier of the estate being administered, the ISA being closed or 3 years from the date of his death
What effect would gearing have on a positive portfolio return?
magnify the positive return
if a trust is trading at a discount what does this mean?
shareholders are buying underlying assets at a lower price than if they bought the same investments directly
how long does EIS need to be held for at least __ years to be free of inheritance tax?
2 years
What is the annual JISA allowance per annum?
£9,000
at what age does a child JISA take the role from his parents as the ‘registered contact’
16
if someone buys a future do they want that stock to increase or decrease?
increase - so they can buy at the lower agreed price
when making an initial financial future trade a client has ongoing rights or obligations to the market. This is known as
Open position
When trading financial future open positions are revalued on a daily basis. This is known as:
Making the market
What are the equity content of each of the following portfolios:
Cautious
Balanced
Growth
Adventurous
Cautious - 40%
Balanced - 50%
Growth - 65%
Adventurous - 75%
What is the purpose behind stochastic modeling?
using probabilistic methods to estimate the range of future returns
stochastic modeling provides a guide to future portfolio return through:
Mathematical techniques that generated probable returns based on assessments of returns and volatility
“An exchange-traded fund uses derivatives to match an index” is the best way to describe what ____ passive fund
synthetic
What are the SDLT for Residential properties valued at:
- up to £125,000
- £125,001 to £250,000
- £250,001 to £925,000
- £925,001 to £1,500,000
- Over £1,500,000
- up to £125,000 0%
- £125,001 to £250,000 2%
- £250,001 to £925,000 5%
- £925,001 to £1,500,000 10%
- Over£1,500,000 12%
First-time buyers don’t pay SDLT on the First £_____ of the purchase price? At what price does the relief not apply?
First-time buyers don’t pay SDLT on the First £500,000.
This does not apply to properties over £500,000
What are the SDLT for commercial properties valued at:
- up to £150,000
- £150,001 to £250,000
- over £250,001
- up to £150,000 0%
- £150,001 to £250,000 2%
- over £250,001 5%
What extra stamp duty do you have to pay on BTL properties?
extra 3%
What is bail in risk?
if a bank is on the brink of failure and as a consequence, the depositor suffers a loss on their holdings.
What is bailout risk?
Where it is a government or central bank that bails out a financial institution in difficulty
What does ‘uncovered calls’ refer to?
writing options over shares (or assets) that the seller does not own
Bond titles will contain 3 key features:
- Issuer’s name
- Coupon
- Maturity Date
Explain Bond’s mid-market price:
The point between buying and selling prices quoted in the market. An investor would pay higher to purchase a bond and receive a lower price on a sale.
Explain bond’s clean price process:
- bonds that ignore the value of accrued interest
Explain a cum dividend bond?
the purchaser will receive the full interest despite someone owning it before them.
However, the buyer much compensate the sell for those months interest
Explain a Ex dividend bond?
interest is paid to whoever holds it 7 working days before the interest payment date
If the bond is purchased after this time it is bought without the dividend and the interest will be paid to the seller. (the price should reflect this)
Explain a dirty price bond?
clean price + or - any interest adjustment
explain what a derivative is?
a financial contract that derives its value from the value of an underlying investment
Purchase Life annuities (PLAs) are spilt into two elements the capital and income element. How is each taxed?
capital element - tax free as deemed to be part return of original capital
Income element - is taxed as saving income
What tax relief is offered on VCTs, SEISs, and EISs? And what are their maximum investment?
VCT - 30% up to a maximum £200,000
SEIS - 50% up to a maximum £100,000
EIS - 30% up to a maxium £2,000,000
How are NS&I guaranteed income bond taxed?
Interest is paid gross but is taxable and can be set against personal saving allowance
Gilts are classified as 3 different time frames in relation to redemption
short, mediums or longs
What is more tax-efficient, PLA or pension annuities?
PLAs are slit into capital element which is tax free and an income element which is taxed as savings income. Pension annuities are taxed in full as earned income. Therefore PLAs are tax more favourable.
The rule of thumb that 95% of returns will fall within __ standard deviations
2 standard deviations
If the result of a sharpe ratio is negative, what does this represent?
that a risk free asset would have performed better than the investment being analysed
Generally, the higher the sharpe ratio the _____
the better the return on an investment compensates an investor for the risk taken (the better its risk performance has been)
the first £_____ of dividends is tax free
£2,000
Stamp Duty is rounded up to the next multiple of ____
£5
SDRT is rounded up to the next multiple of ____
nearest penny
Stamp duty is charged if the transfer is over £_____
£1,000
SDRT is charged if the transfer is over £_____
£0
Does Stamp Duty or SDRT going through the CREST system (Computerised register of shares)
SDRT
What is the SDLT charged on a property with a NPV that exceeds £125,000 for residential and £150,000 on commercial properties?
1%
according to behavioural finance and individual would most likely to:
believe that after a fall in value that their investment will not recover over time
A key principle of arbitrage pricing theory is the relationship between the price of a security and
several risk factors
A core-satellite approach invests in a mixture of _____
passive and active holdings
Stamp duty on Limited company buying residential property
-£500,000 tax free
Remaining amount @15%
The key difference between a fixed charge vs a floating charge debenture?
Fixed charge has a higher priority than a floating charge payment
When using stochastic modeling you should be aware that:
it is highly sensitive to small changes in input data
What is the contribution to Maximum investment plans per annum?
How long do they have to be held before you have tax free access?
- £3,600
- three-quarters of the premium paying term has elapsed
What costs are not allowed to claim against regarding property purchase?
interest on maintenance loans
investment bonds allow you to take 5% of: Original value or current value per policy year?
Original value
A bond offering which combination of period to redemption and value of coupon will be the most volatile?
Long period to redemption and low coupon.
What is the only type of income can losses in rental income be offset against?
Rental Income
Prospect theory is the same as what theory?
loss aversion
Under the Investment Association’s (IA’s) categorisation rules, to be included in a particular sector a fund must have at least what percentage of its assets invested in that sector?
80%
What is the personal savings allowance for:
- Basic rate tax payer?
- High rate tax payer?
- Basic rate tax payer - £1,000
- High rate tax payer - £500
A structured product is typically based on combining two investment instruments within the wrapper of the product. These are a:
zero-coupon bond and a call option
Quantitative easing is a form of monetary policy that, when used in isolation, will tend to:
reduce short term interest rates.
gor has enquired about the property income allowance. You advise him:
if the property income is less than £1,000 per annum before expenses have been deducted, it will be exempt from income tax and will not have to be declared on his tax return.
Carys has an index-linked UK Government gilt. The amount paid on this is linked to the:
retail prices index.
What is the difference between CAPM and Alpha calculations?
Alpha = Actual Return - (RF+(B(RM-RF)) CAPM = RF +B(RM-RF)
What is the minimum amount you have to buy treasury bills at?____
How often are they auctioned?
£500,000
they are auctioned on a weekly basis
Maximum investment plan need to be held for a minimum of ____ years to qualify?
7.5 years
Information Ratio is used to calculate what?
Used to assesss the risk adjusted performance of active portfolio managers
Alpha shows:
The difference between the return you would expect to see from a security given its beta and the return it has delivered
Sharpe Ratio:
Is a measure of how well the return on an asset compensates the investor for the risk taken
What combination of bond is most volatile?
(low/high) coupon
(short/long) Period
Low Coupon, Long Period
Buyers of future are taking a ___ position?
Long
Sellers of future are taking a _____ position?
short
