Risk

Question 1

Risk of David inv trusts

Answer 1

Cuz

Question 2

Main Risks

Inflation

Taxation

Interest

Liquidity

Currency

Diversification

Non systemic

Market systemic

Default

Answer 2

Inflation / spending power of an asset/fixed income is eroded.
This will have an impact on David and June on the purchasing power of fixed income and pension benefits and the value of investments

Taxation - Tax legislation can change, changes in the future may make tax treatment of investment and pensions less advantageous

Interest - Rates can vary/fluctuate - Falls in interest could reduce the interest on savings, reducing essential income. An interest rate rise will reduce value of fixed interest assets

Liquidity- Assets may be illiquid when cash is needed/ cannot partially encash - often main assets is the home or commercial property held within a SIPP

Currency - exchanges rates can vary and be volatile - changes in exchange rates will affect the value of non sterling assets

Diversification/concentration- Too many eggs in one basket either assets class or geographic area -without diversification higher chance of making a loss if the investment held fall. Portfolio needs to be rebalanced and monitored to maintain their desired asset allocation

Non systemic - risk of a company failing / any equity fund is subject to risk of individual holdings failing

Market systemic- value of stock market can fall - equity asset classes held are exposed to market volatility

Default/provider - investment provider may not be able to pay monies invested - assets held may be in excess of FSCS compensation limits or may not be protected at all

Question 3

Describe process of using a risk profiling tool

Answer 3

• both clients complete a questionaire
• this focuses on their priorities, time scales and circumstances
• the answers are then fed into a computer software
• this deduces the risk score
• the score is used to produce a recommended asset allocation
• which often uses the efficient frontier for investments
• this result will then be discussed with both of them
• to ensure it matches with their interpretation of risk

Question 4

State 4 limitations of using an asset allocation model is cash flo

Answer 4

• Charges are not taken into account
• it does not recommend an appropriate tax wrapper/ does not take into account the clients tax status
• questions asked are not always relevant to clients circumstances
• different models produce different results
• underlying assumptions are subject to change based on historical data
• Needs to be reviewed/ only relevant at a specific point in time

Question 5

Key risks for purchase of holiday home

Answer 5

• It will be an illiquid investment, which will be a problem if they require funds quickly
• Changes in legislation may lead to the CGT payable on sale increasing
• Costs of purchase and up keep may be higher than expected
• Their overall portfolio will have a large amount invested in property and property prices may fall

Question 6

Keys risks of David’s and June’s various cash holdings

Answer 6

Inflation - Spending power may be eroded over time

Default - Of BK bank becomes insolvent only 85k of David’s cash holdings will be protected by the FSCS

Interest rate - rates could remain low/ fall further

Taxation- Tax rules may change and increase tax payable on interest.

Question 7

Risks of David’s Global Equity Investment Trust

Answer 7

• Gearing may increase volatility/level of risk involved and this may increase any losses
• May lack liquidity if fund is not traded daily
• May be traded at a discount when David wishes to sell and so proceeds may not reflect the underlying value
• Holdings may be negatively impacted by exchange rate movements
• The investment lacks diversification as the vast majority of holding will be in equities