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fca 1: securities > Investment Management > Flashcards

Investment Management Flashcards

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SIE Exam flashcards
1
Q

how is expected returns calculated?

A

by taking the probability of each and multiplying that by the scenario return and summing the results

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2
Q

what does variance measure?

A

the extent to which returns ‘vary’ from the average return

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3
Q

what is standard deviation/

A

the square toot of variance, used a statistical measure of risk that depicts the likely variation from ER levels

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4
Q

what are the different types of risks when investing?

A
  • market/systematic risk
  • inflation risk
  • interest rate risk
  • reinvestment risk
  • exchange rate risk
  • political and legal risk
  • regulatory risk
  • Default Risk
  • Liquidity risk
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5
Q

what is forward looking forecasting?

A

forecasts and probabilities which asses the likelihood of each possible state of the world occurring and estimates the returns given that particular outcome

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6
Q

what is backward-looking forecasting?

A

study of historical data and frequencies under the assumption that this will be representative of the future.

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7
Q

what is the risk profile for equities?

A

they are generally considered to be risky however they offer potential to deliver high returns if held long-term

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8
Q

what is equity risk premium?

A

the higher rate of return that is required to entice investors to take on the risk of owning equity

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9
Q

what would prompt an investor to go into money markets?

A

if they have an investment horizon that is very short and want a low-risk, relatively secure form of storage for their cash

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10
Q

what is the attractiveness bonds?

A

that they offer a regular, pre-determined coupon combined with the relative certainty of the principal amount being repaid

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11
Q

what are the risks that could affect bonds?

A
  • interest rate risk (can cause adverse movement to bonds)
  • inflation risk (value of the investment held may fall)
  • default risk (risk of the issuer defaulting on their payment)
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12
Q

what are the risks around overseas shares and debt?

A
  • currency
  • country
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13
Q

what is diversification?

A

can remove some of the market risk without having to removing all high-risk investments from a portfolio by combining securities that are not perfectly, positively correlated

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14
Q

what is correlation?

A

the level of association between movements in price and returns of each asset

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15
Q

what are the different types of diversification?

A
  • asset class
  • maturity
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16
Q

what is hedging?

A

attempt to reduce risk, usually via derivatives- objectives is to buy and sell to reduce the exposure to market fluctuations, done by taking the opposite position to what is held within the portfolio via a derivative

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17
Q

how can futures contracts be used to hedge?

A

can be used to hedge against equity prices falling- will remove any upside as well as downside

18
Q

what are the advantages of using futures contracts to hedge?

A

lower cost, greater efficiency and less portfolio disruption

19
Q

what are the drawbacks to using futures contracts to hedge?

A
  • futures contract may not directly emulate (adversely) the performance of the relevant index/instrument
  • investor must know when to enter/exit the futures hedge
  • there are operational and regulatory considerations to be made
20
Q

how can options be used to hedge?

A

investors can purchase put options on those positions, meaning they have the right but not the obligation to sell at a given right. - they can enjoy the upside whilst also being protected from excessive loss

21
Q

what is a CFD and how is it used in hedging?

A

contract for difference- doesn’t confer right of ownership to the underlying asset. tracks the price of an underlying asset- asset or fund managers can use them to gain exposure to market movements

22
Q

how are CFDs traded?

A

margin-traded, the investor doesn’t have to deposit the full value of the underlying asset with the CFD provider

23
Q

what are the benefits of CFDs?

A
  • allow investors to benefit from the downward movements of equity positions or index
  • enable fund managers to retain positions in the instrument but have a derivative position as well which makes it equivalent to short-selling a stock
  • given amount of capital can control a larger positon
24
Q

what are the costs associated with CFDs?

A
  • commissions built into each deal
  • costs built into the spread of the CFD price
  • subjected to daily financing charge, usually applied at previously published interest rate e.g., SOFR
  • have to pay financing on long positions and receive funding on short positions
25
Q

how much margin are investors required to maintain as part of a CFD?

A

1-30%

26
Q

what is the effect of leveraged products?

A

maximum exposure is not limited to the initial investment- possible the investor looses more than the margin they put in- additional money must be paid in the form of margin calls

27
Q

what are the different types of margins?

A

initial margin: normally between 5-30% for shares/stocks and 1% for indicies and forex

variation/maintainence margin: if the market position moves beyond the amount taken as initial margin- additional margin will be required

28
Q

what are the levels of seniority when it comes to debt?

A
  • senior
  • subordinated
  • mezzanine and payment-in-kind

lower the tier, the higher the interest rate to reflect the additional risk

29
Q

how can active management be used in the bond market?

A

if the bond is considered mispriced then active management strategies can be employed to capitalise upon this

30
Q

what is bond switching?

A

actively exchanging bonds perceived to be overpriced for those perceived to be under-priced- used by portfolio managers who believe they can outperform a buy-and-hold passive policy

31
Q

what are the different types of bond switching?

A

anomaly switching: moving between two bonds similar in all respects apart from yield and trading price

policy switching: when an interest rate cut is expected but not implied by the yield curve, shorter-dated bonds are sold in favour of longer-dated bonds

inter-market spread switch: when it’s believed that the difference in the yield being offered between corporate bonds and comparable government bonds

32
Q

what is smart beta (passive management)?

A

uses an alternative weighting systems e.g., weighting based on dividends, sales revenue etc.

33
Q

what is immunisation?

A

passive management strategy technique employed by those bond portfolio managers with a known future liability to meet

34
Q

what are the two strategies of immunisation?

A

cash matching: constructing a bond portfolio whose coupon and redemption payment cash flows are synchronised to match the liabilities that they have to meet

duration-based immunisation: constructing a bond portfolio with the same initial value as the present value of the lability- designed to meet at the same duration of the liability

35
Q

what is the efficient market hypothesis?

A

theory stating its impossible to beat the market because stock market efficiency, means stocks will always trade at their fair value- impossible to purchase under/overvalued stocks. lends itself to passive management

36
Q

what are the different criteria that can be taken into account when ESG investing?

A
  • environmental
  • social
  • governance
37
Q

what are the PRI?

A

principles for responsible investment

created by the UN to incorporate ESG issues into investment practice, made up of 6 principles

38
Q

what is the role of the TCFD?

A

task force on climate-related financial disclosures, develop recommendations for more effective climate-related disclosures- published 4 recommended areas in 2017

39
Q

what does the spectrum of investing take into account?

A

nature and extent to which ESG factors are included within an investment strategy

40
Q

what are the advantages of ESG investing?

A
  • better returns
  • lower risk
  • better reflect changing attitudes
41
Q

what are the disadvantages of ESG investing?

A
  • ethics may cloud judgement
  • requires more research
  • greenwashing

fca 1: securities (7 decks)

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