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Question 1

Strategic Asset Allocation

Answer 1

1. Decide what proportion of of portfolio in broad asset classes taking into account
   Risk
   Market conditions
   Diversification
   Liquidity
   Investment time horizon
   -Then follow top down
   Works based on EMH and is for long term investing.

Question 2

Tactical asset allocation

Answer 2

Also known as market timing.
Allows investment manager to move range of each asset classes depending on market
E.g
Cash 10-20%
Bonds 10-40%
Equities 45-75%
Total 100%

Question 3

Bull or Bear market

Answer 3

Bull - Investors/market as a whole are positive
Bear “ “ “ negative

E.g.
Fixed income - if investment manager bullish… take longer duration bonds

Equities - bull increase exposure to higher beta stock

Derivatives-
Bull - buy call options or go long
Bear - buy puts or go short

Question 4

Business cycle names and characteristics

Answer 4

Recovery/acceleration - sluggish output, weak profits, interest rates and inflation falling

Boom - fast growth, inflation rises & interest rates increase to dampen demand

Slowdown - growth slows, inflation high, central banks reluctant to cut rates. Sales drop & unemployment rises

Recession - output sluggish, weak profits. Inflation & interest rates falling.
Recession is 2 quarters of negative inflation.
Depression sometimes happens when trough low and high level of business failure

Question 5

Types of inflation (3 main types)

Answer 5

3 main types

Demand pull - companies charge more because they can as people have more spare money.

Cost pull - low supply of goods, companies charge more as they have less to sell but still need to make a profit.

Built in - caused by expectation. Employees see prices rise,
they ask for pay rises
Companies have to put prices up

Question 6

types or risk

Answer 6

Capital/credit risk - (default, downgrade, credit spread, counter party & Bail-in)
Liquidity risk
Event risk
Interest rate risk
Inflation risk
Currency risk
Shortfall risk
Systemic/non-systemic risk
Market risk
Political risk
Regulatory risk

Question 7

Bond duration and how it moves with changes in interest rate

Answer 7

Bonds have an inverse relationship with interest rates. The duration measures how sensitive the bond is.
If a bond has a duration of 5 and interest rates go up by 1% the bond would go down by 5%.

Question 8

Top down investment order

Answer 8

Asset allocation
Sector selection
Stock selection

Question 9

Stochastic Modelling (Monte Carlo Simulation)

Answer 9

Asset allocation based economic model.

Predicts probable outcomes for different investments.

Major cause of 07/08 financial crisis as practitioners used overly optimistic assumptions

Should be reviewed quarterly