Brand 23/24 Questions Flashcards
What is the underlying assumption central to Modern Portfolio Theory (MPT)?
A. Investors are completely irrational making decisions based on fact.
B. Investors are risk averse and would choose a less risky investment if it offered the same return.
C. That investors have persistent biases which are motivated by psychological factors.
D. Security prices fully reflect all available information and prices rapidly adjust to new information.
B. Investors are risk averse and would choose a less risky investment if it offered the same return.
MPT is a theory on how to construct a portfolio so that the expected return is maximised for the given level of risk, using the underlying assumption that investors are risk averse and given two investments offering the same return they would choose the less risky one. - Chapter 4, Section A, Learning Outcome 3.1
James has one buy-to-let property and is currently looking to invest in a second. He has been warned that he may suffer liquidity risk. You can tell him that this refers to
A. the risk of the tenants’ being unable to pay the rent and him having to take legal action.
B. a new government changing fiscal policy resulting in a reduced rental yield.
C. the potential of his being forced to sell a security at a price below its fair value.
D. the risk of his not being able to find tenants when an existing tenant vacates the property.
C. the potential of his being forced to sell a security at a price below its fair value.
Gemma is new to investment and has been advised that her portfolio should include a level of cash liquidity. This is most likely in order to
A. take advantage of the fact that tax is not paid on any interest.
B. meet with the FCA legislation on holdings of cash.
C. take advantage of short-term investment opportunities.
D. provide higher returns over the longer term.
C. take advantage of short-term investment opportunities.
One of the key factors for including a level of cash liquidity in a personal portfolio is to allow the investor to take advantage of short-term investment opportunities. Taxpayers are usually liable to tax on interest (above the personal savings allowance) and cash does not generally produce higher returns over the longer term. There is no set FCA legislation on the amount within a portfolio that should be invested in cash. - Chapter 9, Section B2C,
Which of the following are common ratios used in evaluating fund performance and in particular risk-adjusted returns? (Tick all that apply.)
A. Gearing ratio.
B. Information ratio.
C. Alpha.
D. Price-earnings ratio.
B. Information ratio.
C. Alpha.
The ratios used in evaluating risk adjusted returns are the information ratio (which assesses the risk-adjusted return of active managers) and alpha (the difference between the expected return of an investment, given its beta, and its actual return). The Sharpe ratio also measures risk-adjusted returns. - Chapter 11, Section B2, Learning Outcome 9.1
If the economy is in a boom phase, what effect (if any) is this likely to have on the price of fixed interest securities?
A. There will be no effect.
B. They will rise.
C. Prices will need to be pushed up.
D. They will fall.
D. They will fall.
A ‘boom’ phase is a period of rapid economic expansion; people pay more for goods and services resulting in higher interest rates, inflation rates and rising asset prices. This means interest rates on offer from fixed interest securities will be less attractive and so their prices will fall.
Which of the following is not a method used by index-tracking fund managers?
A. Full replication.
B. Optimisation.
C. Stratified sampling.
D. Stochastic modelling.
D. Stochastic modelling.
The main methods of index tracking used by a passive fund manager are full replication, optimisation and stratified sampling.
An investment manager has issued a contract note to their client following the purchase of a holding. This would usually contain the (Tick all that apply)
A. bargain date.
B. execution venue.
C. full name of the share purchased.
D. settlement date.
E. Capital Gains Tax payable.
A. bargain date.
C. full name of the share purchased.
D. settlement date.
Bobby has been offered shares in a company where he will only qualify for dividend payments after the dividend on ordinary shares has reached a pre-determined level. From this information, we can say that Bobby has been offered
A. ‘A’ ordinary shares.
B. non-voting ordinary shares.
C. preference shares.
D. deferred ordinary shares.
D. deferred ordinary shares.
Deferred ordinary shareholders do not usually qualify for a dividend until the dividend on the ordinary shares has reached a pre-determined level, or until a specific period after their issue. Chapter 2, Section A3B, Learning Outcome 1.1
Madeline has invested in a number of different gilts. Within the title of each one she can expect to find the
A. risk rating.
B. coupon.
C. interest payment dates.
D. gross redemption yield.
B. coupon.
When making an initial financial future trade, a client has ongoing rights or obligations to the market. What is this known as?
A. Open position.
B. Marking to market.
C. Initial margin.
D. Variation margin.
A. Open position.
When making an initial financial future trade, a client opens their position in the derivatives market, they are then said to be holding an ‘open position’, and they have ongoing rights and obligations to the market. - Chapter 8, Section H1B, Learning Outcome 6.2
