Book - Chapter 12 ST Questions Flashcards
- What should a typical investment policy statement contain?
It should document a client’s investment strategy and set out
- The long-term objective that is being aimed for.
- Any specific income or growth objectives.
- Timescale over which the funds are being invested and when any known liabilities are due.
- A statement about the client’s risk profile.
- The strategic asset allocation policy.
- Any constraints or other issues, such as ethical or socially responsible investment.
- What does the concept of ‘look through’ refer to when managing a portfolio?
Portfolios should ideally not be managed in isolation; asset allocation decisions should look through the wrappers to identify the overall picture.
- What is churning and why is it a breach of regulations?
Churning is a switch of investments. where the primary aim is to generate commission for the benefit of the firm, rather tha1n to act in the best interests of the client.
- If a trust is created and has no express investment powers, what can the trustees invest in?
The Trustee Act 2000 gave trustees a new and wide statutory power of investment and permitted trustees to invest in investments of any kind as if they were absolute owners.
- What index might be used for a charity that wants its funds invested in accordance with ethical principles?
There are ethical indices that can be used such as FTSE4Good.
- What would you expect to see contained within a tax reporting pack given to clients?
Whether a tax report is provided will depend on the service offered by an investment firm. Where it is, the types of reports that might be provided include tax certificates;
CGT reports showing calculations of chargeable gains or losses arising from trading activity; and CGT history reports that show the acquisition cost of each holding in the portfolio.
- Which index is typically regarded as the most appropriate benchmark for a diversified portfolio of US stocks - the Dow Jones industrial average, the NASDAQ index, or the S&P 500?
The S&P 500 is regarded as the best indicator of the US equity markets. It focuses on the large cap segment of the US market and provides coverage of approximately 75% of US equities that trade on NYSE and NASDAQ.
- Why is time-weighted return preferred over money-weighted return when comparing different portfolios?
The MWR method of measuring returns is not considered appropriate when trying to evaluate and compare different portfolios as it is strongly influenced by the timing of cash flows and this timing could be outside the control of the fund manager.
It does not identify whether the overall return for the investor is due to the ability of the fund manager or as a result of when additional funds were invested.
What is the purpose of performance attribution and to what factors does it attribute performance?
Performance attribution is used to explain why a portfolio’s performance differs from the benchmark. This difference between the portfolio return and the benchmark return is known as the active return. The process is known as performance attribution and attributes the performance to:
- Asset allocation.
- Sector choice.
- Security selection.
