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CISI - Portfolio Construction Theory in Wealth Management > Winter 2022 Exam > Flashcards

Winter 2022 Exam Flashcards

1
Q

If a bond currently sells at a high premium, which of the following is true about the bond price, par value, yield to maturity (YTM) and coupon rate?

a. Bond price < par and YTM > the coupon rate
b. Bond price < par and YTM < the coupon rate
c. Bond price > par and YTM > the coupon rate
d. Bond price > par and YTM < the coupon rate

A

d. Bond price > par and YTM < the coupon rate

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2
Q

All of the following investments qualify for innovative finance individual savings accounts (ISAs) except?

a. Crowdfunded debt securities issued by companies
b. Bonds issued by registered charities
c. Liquidity within e-money wallets
d. Peer-to-peer loans facilitated by an authorised operator

A

c. Liquidity within e-money wallets

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3
Q

Which bond offers an investor the most protection?

a. High yield corporate bonds
b. Subordinated investment grade corporate bonds
c. Callable bonds
d. First-mortgage bonds

A

d. First-mortgage bonds

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4
Q

The call-option value of a callable bond is likely to be highest when?

a. Economic growth is moderate and expected to be moderate
b. Economic growth is variable
c. Interest rates are volatile
d. Inflation is moderate and expected to be moderate

A

c. Interest rates are volatile

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5
Q

If futures prices are higher than cash prices, the market is said to be?

A

b. In contango

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6
Q

All of the following statements about commodities are correct except?

a. Commodities which can be standardised are usually traded on exchanges
b. Commodities traded on regulated exchanges generally need to be fungible
c. Hard commodities include all types of grain before processing
d. The price for all types of commodities is generally set by market forces

A

c. Hard commodities include all types of grain before processing

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7
Q

All of the following statements about the Information ratio are correct except?

A

b. The Information ratio indicates the active return above the risk-free rate for each unit of risk taken

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8
Q

All of the following are actual tax advantages of ISAs except?

A

ISA investments generally fall outside an estate for inheritance tax (IHT) purposes

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9
Q

Which of the following is a key motivation for investment in commodities?

A

Positive correlation with expected and unexpected inflation

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10
Q

Which is the best test of the classic weak form of the efficient market hypothesis?

A

Serial correlation in stock returns

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11
Q

When comparing a property, or real estate, unit trust with a direct holding in commercial property an investor should be aware that:

a. normally, the price of the unit trust is significantly affected by the supply and demand of unit holders
b. the unit trust is able to borrow up to 25% to purchase additional property
c. a direct holding is likely to be the more liquid means of investing in the asset class
d. unit trusts are able to invest in the shares of property companies or directly into the property itself

A

d. unit trusts are able to invest in the shares of property companies or directly into the property itself

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12
Q

All of the following about an individual who is resident in the UK, but not UK domiciled (a ‘non-dom’) are correct except?

a. The remittance basis charge for an individual that has been UK resident for 12 out of the previous 14 years is currently £60,000
b. Funds remitted to the UK on a remittance basis which are then invested in EIS companies in the UK are tax free
c. Remittances of income and capital gains can be managed through separate bank accounts overseas
d. When a non-dom individual encashes a tax-efficient investment for nondoms in the UK that qualifies for business investment relief – the tax liability is the same for a non-dom as a UK-domiciled individual

A

When a non-dom individual encashes a tax-efficient investment for nondoms in the UK that qualifies for business investment relief – the tax liability is the same for a non-dom as a UK-domiciled individual

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13
Q

Investors in currencies can participate in the FX market by opening accounts with brokers that enable them to regularly do all of the following except?

a. Trade via a currency option derivative
b. Trade directly with large companies’ international Treasury departments
c. Trade in the futures markets
d. Trade in the spot market

A

b. Trade directly with large companies’ international Treasury departments

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14
Q

Which investment is least likely to be a close match for a low risk, or cautious, client risk profile?

a. Financial institution deposits
b. UCITS-managed funds
c. Gilts
d. Annuities

A

b. UCITS-managed funds

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15
Q

The government bond yield curve is conceptualised to comprise all of the following investment return premiums except?

a. Liquidity premium
b. Nominal rate premium
c. Expected inflation premium
d. Market risk premium

A

b. Nominal rate premium

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16
Q

The Taylor rule is a macroeconomic measure used to inform investors and policymakers about?

a. Nominal additional output relative to full capacity output
b. Real additional output relative to real full capacity output
c. Potential inflation pressure relative to the target inflation rate
d. Central bank policy interest rate

A

d. Central bank policy interest rate

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17
Q

The annualised yield of UK Treasury Bills:

a. is always higher than their discount rate
b. is always lower than their discount rate
c. is always equal to their discount rate
d. could be higher, lower, or the same as their discount rate

A

a. is always higher than their discount rate

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18
Q

The correlation between an index of high yield bonds and a corresponding equity index is usually?

a. Lower than for normal government long bonds
b. Lower than for zero coupon government long bonds
c. Higher than for convertible bonds
d. Higher than for investment grade corporate bonds

A

d. Higher than for investment grade corporate bonds

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19
Q

You manage a discretionary German Bund portfolio for a UK-resident client to meet a real GBP liability the client has in 2025. The client wishes to reduce the GBP risk of the portfolio on a mark-to-market, current valuation basis.

List two ways to reduce the investment volatility of the portfolio.

A
  • switch to shorter-dated stock to reduce duration risk
  • Only hold gilt stock to remove currency risk
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19
Q

List four separate reasons why investment trust prices regularly trade at some discount to net asset value (NAV)

A
  • liquidity risk
  • Investment strategy != investor’s time horizon
  • Concern about the investment trust’s team
  • Perceptions of asset class
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20
Q

List three common methods a manager might adopt when seeking to narrow the discount of investment trust prices

A
  • policy buy back
  • Increase sales and marketing
  • Control the level of gearing
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21
Q

What is a reporting fund?

A
  • A fund approved by HMRC
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22
Q

What does a reporting fund report to HMRC? (4)

A

submission of:

  • assets
  • capital gains
  • dividends
  • and other income
23
Q

For reporting funds, when do investors pay tax and how much allowance do they have?

A
  • arising basis on crystallisation
  • usual limits and allowances
  • 33.75% dividends and 20% CGT
24
Q

What is a non-reporting fund?

A

Fund makes no report to HMRC

25
Q

For non-reporting funds, when is tax paid? (2)

A
  • All returns rolls-up gross
  • no tax paid until sale of units
26
Q

For non-report funds, how are gains taxed?

A
  • All gains treated as income
27
Q

Disadvantage of investing in non-reporting funds?

A
  • higher tax rate for high-income investors
28
Q

Nine main risks arising from a bond portfolio

A
  • Coupons
  • Liquidity
  • Higher INFLATION
  • Proportion of asset-backed bonds
  • Sector and asset concentration risk
  • Downgrade and default
  • Call risk
  • Duration
  • Currency exposure
29
Q

For bond portfolios, what is higher inflation risk?

A
  • Erosion of purchasing power
30
Q

For bond portfolios, what is coupon risk? (3)

A
  • all else equal, low coupon bonds have higher duration
  • if want to shorten duration
  • could repurpose portfolio to higher coupon/shorter maturity
31
Q

For bond portfolios, what is liquidity risk?

A
  • bonds maybe illiquid
  • harder to trade
32
Q

For bond portfolios, why would you want more asset-backed bonds?

A
  • if concerned about economic risks crystallising
33
Q

For bond portfolios, what is sector and asset concentration risk?

A
  • lack of diversification
  • could add more sector
34
Q

For bond portfolios, how do you diverysify the portfolio and spread the risk across more sectors? (4)

A

passively

  • as current bonds mature
  • get new ones

actively

  • selling prior to maturity
  • repurpose sooner
35
Q

For bond portfolios, what is downgrade and default risk?

A
36
Q

For bond portfolios, what is call risk?

A
  • manage call exposure recommended for income-oriented investors
37
Q

What is the purpose of a client risk questionnaire?

A

To determine their risk appetite and tolerance

38
Q

How does a risk questionnaire work? (3)

A
  • Measure an investor’s risk profile
  • Applying a quantitative metric on answers to the questionnaire
  • The result is used to calculate attitude to risk
39
Q

Give an example questions on a risk questionnaire

A

If your portfolio were to drop in value by 30% in one year, which of the following would your most likely reaction?

  • I would worry and withdraw my capital
  • I would ask for an immediate review
  • I would invest for five year plus, and would expect to main the investment portfolio
40
Q

What is the importance of framing of questions with a risk questionnaire?

A
  • How questions asked or ordered could influence the investor
  • Same question asked different ways to ensure consistency
41
Q

What three principles should be used when designing a risk questionnaire?

A
  • Concise
  • Unambiguous
  • Easy to interpret
42
Q

Give three merits of using risk aversion scores in portfolio selection

A
  • Easy to calculate and explain
  • Can track clients change in attitude to risk
  • Differentiate investors with the same objectives
43
Q

Give three drawbacks of using risk aversion scores in portfolio selection

A
  • Doesn’t include risk need or capacity
  • It is one of several techniques to find appropriate portfolio
  • Changes in client’s circumstance might change risk aversion
44
Q

What is certainty equivalent?

A

The utility of the risk portfolio needs to exceed the certainty equivalent rate

45
Q

On a graph, where does the certainty equivalent lie? (3)

A
  • point at which the investor’s utility curve intercepts the y axis
  • where risk on x axis
  • and utility on y axis
46
Q

What is the risk free investment usually used in the certainty equivalent?

A
  • Treasury bill
47
Q

How do you use the certainty equivalent?

A
  • if return is < or = risk-free return, then reject
  • otherwise accept risk portfolio
48
Q

How does certainty equivalent help a client?

A
  • helps understand riskiness between portfolios
  • and risk between portfolio and risk-free alternative
49
Q

In behavioural tests, many people are prepared to forgo £10 to obtain £100 right now rather than £110 in a day. Very few people forgo £10 to obtain £100 in 30 days rather than £110 in 31 days. What is the behavioural finance trait the statement above describes?

A

Present bias

50
Q

In behavioural tests, many people are prepared to forgo £10 to obtain £100 right now rather than £110 in a day. Very few people forgo £10 to obtain £100 in 30 days rather than £110 in 31 days. What is the behavioural finance trait the statement above describes?

A

Present bias

51
Q

What is present bias?

A
  • higher discount rate for ‘now’ compared to ‘in the future’
52
Q

Why is it hard to escaped present bias? (2)

A
  • immediate concerns outweigh distant and abstract ones
  • events near term evoke sense of urgency
53
Q

Why do we have present bias?

A
  • limbic system of brain governs emotions and behaviour
  • hard to dispel
54
Q

How does present bias affect retirement?

A
  • choose to have less and retire earlier
  • rather than continue to work for more later
55
Q

For retirement, what products can help with present bias? (2)

A
  • Deferred annuities may help solve the problem
  • But market is currently very small
56
Q

What is the problem of present bias in terms of retirement?

A
  • Increases risk that private pension money to retire on will be spent early

CISI - Portfolio Construction Theory in Wealth Management (15 decks)

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