Topic Quiz 10 Flashcards
Balanced funds do which of the following?
a. Minimise the possibility of large losses.
b. Target riskier assets to invest in.
c. Mainly invest in equity and bonds.
c. Mainly invest in equity and bonds.
Units in unlisted funds are:
a. Easier to trade than units in listed funds.
b. Harder to value than units in listed funds.
c. A fixed number of units.
b. Harder to value than units in listed funds.
Which of the following is an objective of an investor when deciding on their investment portfolio?
a. Their return requirement.
b. Their investment horizon.
c. Tax considerations.
a. Their return requirement.
AND level of risk they face
Investment horizon and tax considerations are constraints to consider when investing.
Which of the following do you do?
a. Take short showers (under 5 minutes to save water).
b. Climate change is never out of the media, on the television, in the newspaper and on the radio. I get sick of hearing about it.
c. I recycle my paper and glass when I remember.
a. Take short showers (under 5 minutes to save water).
c. I recycle my paper and glass when I remember.
How is the current approach to responsible investment different from the traditional approach?
The current approach is focused on sustainability rather than ethics. Companies that adopt the best environmental, social and governance practices will be invested in. Negative and positive screening of companies and industries would not be used.
How is the current approach to responsible investment different from the traditional approach?
The current approach to responsible investment is focused on sustainability (climate change and the environment) rather than ethics. Companies that adopt the best environmental, social and governance practices will be invested in.
Negative and positive screening of companies and industries would not be used, which is the traditional approach to responsible investment.
What would a passive manager trade when there is a rumour that shares in Roosters Ltd have a positive alpha?
They would do nothing as they manage a portfolio that tracks a benchmark index, such as the ASX200.
Why is equity-based crowdfunding attractive to retail investors?
They are not required to have a large amount of money before they can invest in companies using crowd funding.
What information do regulators (e.g. ASIC in Australia) require the product disclosure statement (PDS) of a managed fund to include?
The key features of the fund, that is the product that is being offered, must be explained in detail.
These features include a description of the financial assets being invested in and the general investment goals and objectives of the managed fund as indicated in the investment policy statement. The investment policy of the fund, fees, commissions, benefits, risks and the complaints handling procedure will also be included.
What are an investor’s objectives and constraints when deciding on what should be in their investment portfolio?
The objectives are the investor’s return requirements and their level of risk tolerance.
The investor’s constraints will be liquidity needs, investment horizon, regulations, unique considerations and tax considerations.
Why does the distribution structure of a financial market have an impact on the size of the market?
The easier it is for investors to trade, that is to buy and sell, on a financial market, the more attractive it will be to investors. This will increase the amount of funds and level of trading on the financial market.
How do managed funds provide the benefit of “divisibility” to investors?
A large volume of financial assets will be traded by the managed fund on behalf of all investors. The investors will benefit from this wholesale investment regardless of how much they invested in the fund.
How does strategic asset allocation differ from tactical asset allocation?
Strategic allocation provides the long-term mix of the asset classes in an investor’s portfolio. Strategic assets are rebalanced periodically to keep weights aligned to the target allocations.
Tactical allocation occurs when there is a temporary deviation from the long-term mix to take advantage of temporary upswings and downswings in individual asset prices and/or financial markets. Tactical assets are actively adjusted and allocated.
What are the two categories of fees that can be charged by a managed fund to investors?
The first category is contribution and withdrawal fees. These are also known as entry and exit fees, and are paid when an investor buys and sells units in an unlisted managed fund. They are not paid by investors trading in listed managed funds. However, trading in units of listed managed funds is subject to brokerage fees.
The second category is ongoing fees. These fees cover the annual administrative, management and trading costs of the fund.
How can the Grossman and Stiglitz paradox explain the higher fees that active managers charge when compared to the fees charged by passive managers?
Active managers pay for a larger amount of information from research than passive managers. This is costly but, as the Grossman and Stiglitz paradox argues, as long as profits can be made from the existence of abnormal returns, active managers will continue to pay for this information.
