Exam Questions Flashcards
(129 cards)
1
Q
How is a return achieved on a Treasury Bill?
A. They pay an interest amount on a daily basis
B. Interest earned is dependent on market conditions and is paid monthly
C. Interest earned is the difference in the purchase price and maturity value
D. They pay a lump sum interest payment at the end of the maturity period
A
C
2
Q
Regarding Fixed Interest Stock, the “dirty price” refers to the:
A. ‘clean price’ plus an additional amount for junk or high yielding bonds
B. ‘clean price’ of the stock plus or minus any interest adjustments
C. mid-market price quoted in major newspapers
D. value of stock over the period until maturity as it moves above or below par
A
B
3
Q
Fixed interest investments regarded as the least volatile are those with a:
A. long period to maturity and a high coupon
B. short period to maturity and a high coupon
C. long period to maturity and a low coupon
D. short period to maturity and a low coupon
A
B
4
Q
Which of the following is a result of the ageing UK population?
A. Declining proportion of wealth spent on manufactured goods
B. Lower average wealth holdings due to increased longevity
C. Demand for services diminishes as people become richer
D. Falling GDP within the banking and insurance sectors
A
A
5
Q
Pauline requires £21,000 in 4 years’ time from £15,000 available now. What annual rate of return will she require in order to achieve this?
A. 6.98%
B. 8.78%
C. 7.24% D. 8.42%
A
B
6
Q
Investors in which asset classes are usually most affected by inflation? A. Equities and cash B. Property and equities C. Cash and fixed interest D. Fixed interest and property
A
C
7
Q
The following clients each have an OEIC that gives them a dividend as follows:
Kin Basic Rate Taxpayer £750
Belinda Higher Rate Taxpayer £1000
Maddy Additional Rate Taxpayer £250
What is the income tax liability for all three clients assuming they have all utilised their dividend allowance?
A. £326.39
B. £340.27
C. £476.50 D. £525.00
A
C
8
Q
The minimum deposit in a Stakeholder cash ISA cannot be higher than: A. £1
B. £5 C. £10 D. £20
A
C
9
Q
100% relief from inheritance tax is available on SEISs after: A. 1 year B. 18 months C. 2 years D. 3 years
A
C
10
Q
Why is portfolio rebalancing an essential feature of asset allocation?
A. A divergence from a client’s asset allocation could mean higher risk than the
client is prepared to take
B. Research suggests rebalancing monthly provides significantly enhanced benefits
C. A client’s attitude to risk will always reduce over time
D. The economic environment presents new opportunities in different asset classes
over time
A
A
11
Q
What effect did the financial crisis have on optimised portfolios created under Modern Portfolio Theory?
A. The portfolios did not deliver the expected diversification benefit as the
underlying rules of correlation on which it is based were not maintained
B. The optimised portfolios created under Modern Portfolio Theory fared better than
those created under the Pragmatists approach
C. It established that Modern Portfolio Theory is acceptable only under ‘normal
conditions’
D. It increased the attention paid to assessing volatility in the overall level of risk
within a portfolio
A
A
12
Q
Which style of investment management is often used by hedge fund managers?
A. Value
B. GAARP
C. Momentum
D. Contrarianism
A
D
13
Q
A positive alpha indicates that the:
A. security has performed worse than would be predicted by its beta
B. risk free rate of return has been positive
C. security has performed better than would be predicted given its beta
D. asset allocation has proved to have had a positive impact
A
C
14
Q
A portfolio was worth £55,000 at the start of the period and £60,000 and the end of the period with £5,000 income paid out during the period. What is the Money Weighted Rate of Return?
A. 18.2%
B. 9.1%
C. 12.8%
D. 11.9%
A
A
15
Q
Which features would you expect to find with a floating rate note? Tick all that apply.
A. Coupons are paid monthly
B. Changes in interest rates affect the market price as per other fixed interest stock
C. The price is likely to remain close to its nominal value
D. The interest rate is linked to a money market rate
E. The interest rate is expressed in basis points
A
C, D, E
16
Q
How do Ordinary shares and Preference shares differ? Tick all that apply.
A. Status ranking in the event of liquidation B. Yields C. Entitlement to dividend payments D. Voting rights E. Frequency of dividend payments
A
A, B, C, D
17
Q
Which indices are aggregated into the FTSE-All Share Index? Tick all that apply.
A. FTSE AIM index series
B. FTSE 100
C. FTSE TMT
D. FTSE 250
A
B and D
18
Q
What are the main conditions that need to be met in order for a Venture Capital Trust (VCT) to be approved by HMRC? Tick all that apply.
A. Its income must be wholly or mainly derived from shares or securities.
B. At least 70%of qualifying holdings must be in ordinary, non-preference shares
C. All of the money raised must be employed within 2 years
D. No more than 10% must be invested in any single company or group
A
A, B, C
19
Q
What characteristics would you associate with a structured product? Tick all that apply.
A. Usually able to make early withdrawals
B. Fixed term
C. Pre-specified minimum or maximum returns
D. Ability to trade during life of product
A
B and C
20
Q
In a period when interest rates have fallen substantially, the nominal value of a conventional fixed interest security at maturity will:
A. increase significantly.
B. decrease significantly.
C. remain constant.
D. increase in line with inflation.
A
C
21
Q
A government can use fiscal measures to address declining GDP by:
A. reducing the Bank of England’s target inflation rate.
B. increasing the rate of Value Added Tax.
C. reducing the level of gilt issues.
D. reducing the burden of Corporation Tax.
A
D
22
Q
A financial adviser has recommended collective investments which are negatively correlated to each other. This will ensure that they:
A. are capable of generating income and growth.
B. have a degree of diversification.
C. have a combined beta of 0.
D. have an alpha with a negative value.
A
B
23
Q
Portfolio X consists of blue chip ordinary shares and portfolio Y consists of unlisted shares. What type of risk is likely to be significantly higher for portfolio Y when compared to portfolio X?
A. Market risk.
B. Event risk.
C. Inflation risk
D. Liquidity risk
A
D
24
Q
If a client has a collective investment where the share price is currently at a significant discount to the net asset value, what type of investment is it?
A. Investment trust.
B. OEIC.
C. Exchange Traded Fund.
D. Unit trust.
A
A
25
Alicia has fully surrendered an onshore single premium investment bond with a chargeable gain of £20,000 after 5 years. If she has no other savings income and her taxable income is £36,000, she should be aware that:
A. the full gain would be subject to 20% income tax.
B. she full gain would be subject to an additional 25% income tax.
C. she would have a personal savings allowance of £1,000.
D. she would have a personal savings allowance of £500.
D
26
A client who invests in a new issue of VCT shares would benefit from its tax treatment because:
A. the proceeds on death will be free of inheritance tax.
B. income tax relief is available at 30% up to a maximum of £200,000 per tax year.
C. shares must only be kept for three years to benefit from income tax relief.
D. an investor can potentially carry back income tax relief to the previous tax year.
B
27
Neil has agreed to have his portfolio managed on a passive basis. This means that he:
A. believes active fund managers will consistently outperform the benchmark index.
B. believes active fund managers will consistently underperform the benchmark index.
C. has increased his risk profile.
D. has reduced his risk profile.
B
28
What is the running yield on a corporate bond that has a clean price of £114, a par value of £100 and pays 5.2% income?
A. 4.56%.
B. 5.2%.
C. 7.85%.
D. 8.6%.
A
29
When agreeing the benchmark for an investment portfolio with a client, what is it always important to do?
A. Select the lowest risk benchmark from the available choices.
B. Use one constructed using Modern Portfolio Theory.
C. Use one that matches the mix of assets in the portfolio.
D. Select a benchmark that is positively correlated with the portfolio’s underlying assets.
C
30
An investor pays a clean price of £116.80 for £100 nominal value of stock with a 6% coupon. Assuming the stock has exactly six years to run until maturity, using the simplified method what is the gross redemption yield?
A. 2.74%
B. 2.80%
C. 5.14%
D. 8.80%
A
31
Kathryn is buying a primary residence for £140,000 and Michael is buying a primary residence for £260,000. How much more Stamp Duty Land Tax will Michael pay than Kathryn, if both are repeat purchasers?
A. £2,700
B. £3,000
C. £5,000
D. £6,400
A
32
A limited company has 6,000 ordinary shareholders. In the current financial year the profits attributable to these shareholders are £1,060,000 and ordinary dividend payments are £410,000. What is the dividend cover?
A. 2.46
B. 2.59
C. 2.71
D. 3.87
B
33
An investment property is purchased for £180,000. The transaction costs totalled £3,600. If the rent is £800 per month, of which 20% is earmarked for general expenses, what will the net yield on this purchase be?
A. 4.18%
B. 4.27%
C. 5.22%
D. 5.33%
A
34
The share price of company X is 260p and the earnings per share is 18p. The share price of company Y is 182p and the earnings per share is 31p. The price earnings ratios of companies X and Y respectively, would be
A. 14.44 and 5.87.
B. 5.87 and 14.44.
C. 6.92 and 17.03.
D. 17.03 and 6.92.
A
35
John owns a number of fixed interest securities and is seeking clarification on the difference between the gross and net redemption yields. The principal difference is
A. the rate of internal taxation within the investment.
B. the tax treatment of the coupon, in the investor’s hands.
C. whether they purchased on a cum or ex dividend basis.
D. whether they were purchased on a direct or indirect basis.
B
36
Stacey has recently bought her first house with a purchase price of £570,000. How much Stamp Duty Land Tax did she pay, if anything?
A. Nothing.
B. £18,500
C. £20,000
D. £28,500
B
37
A limited company has 10,000,000 ordinary shares in issue and £2,500,000 available for distribution as dividends. The current share price is 500p. What is the dividend yield?
A. 1%
B. 2.5%
C. 5%
D. 10%
C
38
Paulina purchases shares in two listed companies as per the following table
Equity Number purchased Purchase cost
X 550 £9,800
Y 499 £10,600
```
What total Panel on Takeovers and Mergers (PTM) levy will she pay?
A. £1
B. £2
C. £106
D. £204
```
A
39
A client invests £10,000 in each of the following three equity-based funds
```
Charge
X 5.5% Initial
Y 4.0% Exit
Z 3.5% Exit
Returns per annum
3.50% 4.00% 3.50%
```
```
Fund X has an initial charge only. Funds Y and Z have an exit charge only. At the end of the three years when all three funds are encashed, which investment, if any, will be worth the most?
A. They will all be worth the same.
B. Investment X.
C. Investment Y.
D. InvestmentZ.
```
C
40
The current price of share X is 247p and the earnings per share is 36p. The current price of share Y, in the same sector, is 206p and the earnings per share is 21p. In general terms, this indicates that
A. share X is more highly favoured by investors than share Y.
B. share X will provide better value than share Y.
C. share Y has higher expectations for growth than share X.
D. share Y issignificantly underpriced.
C
41
```
Three assets are correlated as follows
Asset X Y Z
X 1.0 0.8 -0.2
Y 0.8 1.0 0.3
Z -0.2 0.3 1.0
```
In respect of these correlation values
A. if asset X rises by 7% asset Z is likely to rise by 2%.
B. if asset X rises by 9% asset Y is likely to rise by 7.2%.
C. if asset Z falls by 4% asset X is likely to fall by 0.8%.
D. if asset Z falls by 3% asset Y is likely to fall by 3%.
B
42
An investment manager recently completed four UK-registered share purchases on the same day
```
Method
Crest
Crest
Stock transfer form
Stock transfer form
Purchase Price
£1,500
£7,500
£1,500
£7,500
```
```
The total combined amount of Stamp Duty and Stamp Duty Reserve Tax payable on these transactions is
A. £90
B. £95
C. £180
D. £184
```
B
43
Stefan, a retail client, wishes to create non-correlation for his portfolio through the purchase of two assets as per the following table
```
Asset W X Y Z
W 1.0 -0.3 -0.9 0.2
X -0.3 1.0 0.7 1.0
Y -0.9 0.7 1.0 0.5
Z 0.2 1.0 0.5 1.0
```
```
He would best achieve this by purchasing assets
A. WandX.
B. WandY.
C. XandZ.
D. Z and W.
```
D
44
Two companies have financial data as per the following table
Company X Y
Share Price 174p 220P
Earnings per share 28p 16p
Dividend per share 12p 11p
In respect of their dividend coverage
A. company X’s dividend cover is 4.35 times.
B. company X’s dividend cover is 0.43 times.
C. company Y’s dividend cover is 1.45 times.
D. company Y’s dividend cover is 20 times.
CD
45
Bikram, a higher-rate taxpayer, is considering an investment of £20,000 into each of two corporate bond funds within his stocks and shares ISA, as per the following table
Fund Type Running Yield
X Investment Grade 4.1% per annum
Y High yield 6.8% per annum
```
What total, combined income would he receive in the first year?
A. £1,308
B. £1,744
C. £2,044
D. £2,180
```
D
46
A property investor owns two commercial properties as per the following table
Type Market value Borrowing Remaining lease term
Retail unit £460,000 £240,000 32 years
Industrial unit £345,000 £200,000 22 years
He should be aware that
A. the retail unit has the lower level of gearing.
B. the industrial unit is more sensitive to any short-term change in borrowing costs.
C. he will pay a higher rate of Stamp Duty Land Tax upon disposal of the retail unit.
D. he will be subject to void risk on the industrial unit only.
A
47
If the M0 measure of money growth is consistent, but the M4 measure shows a sharp decline, this is usually an indication that
A. deflation has been experienced.
B. interest rates have increased.
C. lending activity has reduced.
D. the velocity of money has increased.
C
48
```
If the annual rate of inflation falls from 1.8% to 0.3%, this is an example of
A. deflation.
B. disinflation.
C. fiscal loosening.
D. monetary loosening.
```
B
49
The price of conventional gilts has recently fallen. The most likely reason is because
A. equity prices experienced a sharp rise.
B. an increase in the inflation rate was predicted.
C. interest rates have fallen.
D. real returns on cash-based investments fell.
B
50
```
In a period when interest rates have fallen substantially, the nominal value of a conventional fixed-interest security at maturity will
A. increase significantly.
B. decrease significantly.
C. remain constant.
D. increase in line with inflation.
```
C
51
When interpreting the money supply rates for the UK economy, a financial adviser should be aware that
A. change in the rate of money supply is the principal cause of change in the economic cycle.
B. contraction in the M0 measure indicates consumers are spending less money.
C. expansion of the M0 measure indicates banks are increasing their levels of new lending.
D. volatile money supply will lead to volatile inflation.
B
52
A key effect of globalisation on the UK economy is
A. an influx of overseas financial institutions via the passporting rules.
B. the reduced competitiveness of labour intensive industries.
C. reduced consumer choice in technology products.
D. upward pressure on wage price inflation.
B
53
If the Government decides to boost declining Gross Domestic Product (GDP) by using fiscal measures, this could be achieved by
A. increasing the rate of Value Added Tax.
B. reducing the Bank of England’s target inflation rate.
C. reducing the level of gilt issuance.
D. reducing the rate of Corporation Tax.
D
54
An investment manager has constructed a portfolio of UK equities using Modern Portfolio Theory (MPT). One of the key limitations of this approach is that
A. diversification will be neglected.
B. income will often be sacrificed for capital growth.
C. performance will be derived from a relatively small number of shares.
D. systematic risk cannot be fully addressed.
D
55
```
An investor wants to create an equity portfolio using the Capital Asset Pricing Model (CAPM) which produces an expected return of 8% per annum. What key factor will they need to consider?
A. Alpha.
B. Beta.
C. Covariance.
D. Standard deviation.
```
B
56
```
The efficient frontier curve shows the optimum balance between
A. inflation and return.
B. return and taxation.
C. risk and return.
D. taxation and risk.
```
C
57
An actively managed equity portfolio is benchmarked against the FTSE 100 Index. The portfolio has a beta of 0.85 and an alpha of 1.15. What does this indicate about the investment manager’s performance?
A. He was over weight blue chip equities.
B. He was underweight blue chip equities.
C. His fund is slightly more volatile than the benchmark.
D. He has added value through his stock selection.
D
58
```
A retail investor is studying the risk-adjusted return of an actively-managed UK-equities collective fund. In order to calculate the Sharpe ratio, the investor will need to know the
A. alpha of the fund.
B. beta of the relevant equity market.
C. expected market return.
D. standard deviation of the fund.
```
D
59
Behavioural finance suggests that an individual investor would be most likely to
A. under estimate their ability to achieve good investment returns.
B. base their investment decisions upon technical data.
C. give too much weight to recent positive investment returns.
D. be more pessimistic when markets goup.
C
60
A financial adviser has recommended collective investments which are negatively correlated to each other. This will ensure that they
A. are capable of generating income and growth.
B. have a degree of diversification.
C. have a combined beta of less than 1.
D. have an alpha with a negative value.
B
61
```
Bill and Wendy wish to fund a single school fees payment of £14,000 in four years’ time. If the interest rate is 5% per annum, how much will they have to invest now?
A. £10,969.21
B. £11,517.83
C. £11,666.00
D. £12,093.99
```
B
62
```
A deposit account pays an interest rate of 6% per annum, compounded on a quarterly basis. What will the annual equivalent rate (AER) be?
A. 6.09%
B. 6.14%
C. 6.28%
D. 6.42%
```
B
63
```
A lump sum of £10,000 is invested at 4% per annum for three years and then the resultant sum is reinvested at 5% per annum for two years. What will be the final sum at the end of the term?
A. £12,320.00
B. £12,401.63
C. £12,520.87
D. £12,897.69
```
B
64
```
An investor has increased the number of UK equities in his portfolio from 10 to 40. This action is most likely to
A. increase counterparty risk.
B. increase default risk.
C. reduce non-systematic risk.
D. reduce systematic risk.
```
C
65
```
Portfolio X consists of blue chip shares and portfolio Y consists of unlisted shares. What type of risk is likely to be significantly higher for portfolio Y when compared to portfolio X?
A. Default risk.
B. Event risk.
C. Inflation risk.
D. Liquidity risk.
```
D
66
In order to reduce the interest-rate risk of a bond portfolio, a fund manager would usually
A. increase the modified duration of the portfolio.
B. reduce the modified duration of the portfolio.
C. purchase longer-dated bonds.
D. sell shorter-dated bonds.
B
67
A UK investor is looking to purchase international equities via an open-ended investment company. In respect of currency risk he should be aware that
A. a fund with a covered call strategy will reduce the currency risk.
B. a hedged share class will reduce the currency risk.
C. purchasing share classes issued in local currencies will automatically remove the currency risk.
D. purchasing a UK domiciled fund containing international equities will automatically remove the
currency risk.
B
68
```
Angela has £8,000 and borrows a further £2,000 to purchase some shares. The purchase price of the shares was £2.00 and she subsequently sold them for £1.80 each. Allowing for repayment of the borrowing, what percentage of her original capital would be lost?
A. 10%
B. 12.5%
C. 17.5%
D. 20%
```
B
69
A retail client wishes to compare the risks of investing in the FTSE All-Share Index using three different portfolios as per the following table
Portfolio Asset Type Number of holdings Beta Gearing
X Direct equities 6 1.55 25%
Y Investment trust 25 1.75 35%
Z OEIC 55 0.95 0%
With regard to risk, he should be aware that
A. portfolio X has the highest risk from gearing.
B. portfolio Y has the lowest risk from gearing.
C. portfolio Y has the lowest systematic risk.
D. portfolio Z has the lowest non-systematic risk.
D
70
```
Gemma, Linda and Natalie have each received a £1,000 dividend from a UK Real Estate Investment Trust. Gemma is a basic-rate taxpayer, Linda a higher-rate taxpayer and Natalie an additional-rate taxpayer. If their respective dividend allowances are not available, what is their combined total Income Tax liability of these dividends?
A. £706
B. £725
C. £781
D. £1,050
```
C
71
```
A hedge fund manager is reviewing his current portfolio and wishes to limit downside risk. He would normally be expected to address this by
A. buying call options.
B. buying put options.
C. deferring new investments.
D. increasing gearing.
```
B
72
The manager of a Venture Capital Trust (VCT) has received the following subscriptions
Investor Tax Status Amount
Colin Basic £5000
Betty Higher £10,000
Alan Additional £100,000
```
The total amount of Income Tax relief on these investments would be
A. £23,000
B. £24,000
C. £34,500
D. £50,000
```
C
73
Jebran and Irmak are both higher-rate taxpayers, who have fully utilised their Capital Gains Tax exemption in the tax year 2019/2020, have invested in offshore funds. They have realised gains as follows
Investor Fund Gain
Jebran Reporting £10,000
Irmak Non-reporting £10,000
If no allowances are available to them, what will their respective tax liabilities be?
A. Jebran will pay £1,200 more than Irmak.
B. Jebran will pay £2,000 more than Irmak.
C. Irmak will pay £1,200 more than Jebran.
D. Irmak will pay £2,000 more than Jebran.
D
74
```
Malcolm, a higher-rate taxpayer, invested £20,000 in an onshore investment bond and after four and a half years, makes his first partial surrender of £9,000. The Income Tax liability as a result of this withdrawal will be
A. £800
B. £1,000
C. £1,120
D. £1,600
```
A
75
```
Janet and Graham have made gains of £18,000 and £26,000 respectively in their unit trust holdings. Neither has made any other gains or losses in the tax year 2019/2020. If Janet is a higher-rate taxpayer and Graham is a basic-rate taxpayer, what is their combined Capital Gains Tax liability on these gains?
A. £2,600
B. £3,080
C. £4,000
D. £4,200
```
A
76
An investment trust returns 6% over a given period, compared to the benchmark index which returns 8%. If the investment trust has a beta of 1, this difference can be explained by the
A. fund having a negative alpha.
B. fund having a positive alpha.
C. fund having a standard deviation of 0.75.
D. fund having a standard deviation of 1.33.
A
77
```
Gao and Sying are both UK higher-rate taxpayers. Gao makes a fully chargeable gain of £6,000 from his onshore bond and Sying makes a fully chargeable gain of £6,000 under her offshore bond. Their respective Income Tax liabilities will result in
A. Gao paying £1,200 more than Sying.
B. Gao paying £2,400 more than Sying.
C. Sying paying £1,200 more than Gao.
D. Sying paying £2,400 more than Gao.
```
C
78
```
James and Maria are married and have 3 children aged 16, 18 and 20. What is the maximum amount the family can pay into stocks and shares ISAs in the tax year 2019/2020?
A. £60,000
B. £64,368
C. £80,000
D. £84,368
```
C
79
```
Davina, an additional-rate taxpayer, holds units in two equity-based unit trust funds. In the tax year 2019/2020 she receives one dividend payment of £1,600 and one dividend payment of £750 is reinvested to purchase more units in the fund. If her dividend allowance is NOT available, what is her combined Income Tax liability on the payments?
A. £520.00
B. £609.60
C. £763.75
D. £895.35
```
D
80
```
Henrique, a higher-rate taxpayer and Gregorio, an additional-rate taxpayer, have made a gain on their respective onshore investment bonds. Upon encashment if they each receive a chargeable gain of £8,000, what is their combined total personal Income Tax liability?
A. £3,200
B. £3,600
C. £4,000
D. £5,000
```
B
81
Mei-Xing, an additional-rate taxpayer, has invested in two new issue Enterprise Investment Schemes (EISs) as per the following table
EIS Date of investment Amount invested
X August 2018 £400,000
Y August 2019 £450,000
She should be aware that
A. she may invest a maximum amount of up to £150,000 in the current tax year.
B. EIS X will qualify for business property relief from September 2020.
C. EIS Y will qualify for Income Tax relief of £202,500.
D. she must hold both EISs for at least 5 years for any disposal to be exempt from Capital Gains Tax.
B
82
```
A client is unsure of the nature of her collective investments, except she has been told there is a significant discount to net asset value. What investments does she hold?
A. Exchange Traded Funds.
B. Investment trusts.
C. Open-ended investment company shares.
D. Unit trusts.
```
B
83
David Karen, both in their 50s, are higher-rate taxpayers. They wish to invest £250,000 for long term growth. What would be the main advantage of investing in an offshore investment bond?
A. Any death benefits will be free from Inheritance Tax.
B. Any withdrawals will be tax free.
C. They can control the timing of future personal taxation.
D. They will automatically pay basic-rate tax upon any surrender once they have retired.
C
84
Janet, a retail client, has an existing portfolio and a medium attitude to risk. Her financial adviser has recommended that her latest lump sum investment is fully invested in government bonds. This recommendation is justified because
A. all her existing investments are solely in equities.
B. interest rates are expected to rise.
C. she has fully used her ISA allowances for the current tax year.
D. she is a higher-rate tax payer.
A
85
A retail client wishing to invest on an ethical basis would invest via a collective fund rather than via direct equities because
A. the annual management charge will be capped at the stakeholder limit.
B. a collective fund may offer more detailed ethical screening of underlying investments.
C. he will have greater engagement with company management on ethical issues.
D. the returns will be higher.
B
86
Edward has recently received an inheritance and is considering phasing the cash proceeds into a range of equity unit trusts. What is the main benefit of phasing?
A. To eliminate systematic risk.
B. To enhance Capital Gains Tax benefits.
C. To protect against potential market volatility.
D. To protect the unit trusts’ prices from falling.
C
87
Neil has agreed to use a passive management style for his equities-based UK portfolio. This means that he
A. believes active fund managers will consistently out perform the benchmark index.
B. believes active fund managers will consistently underperform the benchmark index.
C. has increased his risk profile.
D. has reduced his risk profile.
B
88
The completion of a fact-find and satisfaction of the know your client requirements will help the
A. financial adviser to calculate the total expense ratio for his services.
B. financial adviser to decide how to charge for his services.
C. client to choose between active or passive investment management.
D. client to identify their investment time horizon and objectives.
D
89
An investment portfolio incorporating lifestyling would
A. exactly match the client’s attitude to risk.
B. increase its gilt exposure in the early years.
C. maintain a balanced exposure across asset classes throughout its life.
D. reduce its equity exposure in later years.
D
90
A client’s investment portfolio is benchmarked equally against the FTSE All-Share Index and the Dow Jones Eurostoxx 50 Index. This indicates that the portfolio consists of a mix of
A. small cap only UK and European equities.
B. UK equities and US equities.
C. UK equities and European equities.
D. UK passively and actively managed funds.
C
91
A client has an investment portfolio of £250,000. Their main time horizon is 15 years but they also have a secondary time horizon of 2 years relating to a planned capital withdrawal of £25,000 which is currently held in cash within the portfolio. In considering how to benchmark their portfolio, which approach would be most appropriate?
A. They should not adopt any benchmark as the time horizons are too far apart.
B. The entire portfolio should be benchmarked to a 2-year time horizon.
C. 90% of the portfolio should be benchmarked to a 15-year time horizon.
D. The entire portfolio should be benchmarked to a 15-year time horizon.
C
92
When agreeing the benchmark for an investment portfolio with a client, it is important that the chosen benchmark is
A. always in line with the client’s long term investment objectives.
B. always positively correlated with the portfolio’s underlying assets.
C. always the lowest risk for the available choices.
D. derived from the efficient frontier curve.
A
93
Andrea has a medium attitude to risk and a very low capacity for loss. When considering the asset allocation for her new investment portfolio, her financial adviser should be aware that
A. Andrea’s attitude to risk must be reduced from medium to very low.
B. Andrea’s capacity loss must be taken into account when creating the portfolio.
C. no medium risk assets can be used in the portfolio’s asset allocation.
D. only stakeholder products can be used in the portfolio’s asset allocation.
B
94
What is the main advantage of investing in an in-house fettered fund of funds compared to an unfettered fund of funds?
A. The investment choice is likely to be wider.
B. The investment returns are more likely to be higher.
C. The management charges are likely to be lower.
D. The volatility will be lower.
C
95
The relationship between the Ongoing Charges Figure (OCF) and Portfolio Turnover Rate (PTR) can best be described as
A. the OCF includes all dealing costs and increases proportionately to the PTR.
B. the OCF does not include dealing costs and is independent of the PTR.
C. both the OCF and PTR include the dealing costs for the previous 12 months only.
D. the PTR is the best measure of the total cost of investing in a fund.
B
96
An investment manager is constructing a portfolio for a retail client using a top-down approach. Having determined the asset allocation, what is generally the next step in the process?
A. apply a geographical distribution.
B. prioritise the investment style.
C. select a relevant benchmark.
D. select the individual funds.
A
97
A financial adviser is researching ethical funds for a client who has expressed a desire to avoid companies that manufacture armaments. As part of his fund selection criteria in order to meet the client’s requirements the adviser will consider funds that
A. operate a positive engagement process.
B. operate a thematic approach.
C. screen on a negative basis.
D. screen on a positive basis.
C
98
Pauline has agreed that her investment portfolio should be constructed in accordance with the MSCI WMA Private Investor Growth Index. Her discretionary fund manager has decided that owing to current economic conditions, he will deviate frequently in the short-term from the prescribed asset allocation model. His decision is an example of
A. optimisation.
B. partial replication.
C. strategic asset allocation.
D. tactical asset allocation.
D
99
Ivona, a higher-rate taxpayer, owns several direct equities. A main benefit to her of transferring the equities to a wrap would be
A. a consolidated tax statement.
B. exemption from money laundering requirements.
C. higher levels of dividends.
D. longer settlement periods.
A
100
Fund X has a Total Expense Ratio (TER) of 2.1% and Fund Y has a TER of 2.25%. What is the most likely reason for the difference in TERs?
A. Fund X has a lower beta.
B. Fund X has lower dealing costs.
C. Fund Y has a higher alpha.
D. Fund Y has higher custodian and legal fees.
D
101
Balan and Jagdeep each have funds with similar underlying holdings. Why does Balan pay significantly more in management charges than Jagdeep?
A. Balan is exposed to UK equities whereas Jagdeep is exposed to overseas equities.
B. Balan is relatively risk averse whereas Jagdeep is relatively adventurous.
C. Only Jagdeep has holdings in index tracking funds.
D. OnlyJagdeepissubjecttopoundcostaveraging.
C
102
When comparing a property authorised investment fund (PAIF) with a property investment trust
A. only under the PAIF is the price of shares directly linked to the value of the underlying investments.
B. only the PAIF is permitted to borrow money to invest.
C. only under the investment trust can the share price move independently of the value of the
underlying investments.
D. under the PAIF a non-taxpayer can reclaim the tax deducted from any property income
payments.
A,C,D
103
Patrick, a retail client, is looking to invest in commodities in order to increase the diversification of his equity portfolio. If he proceeds
A. as a private investor, he can only invest in soft commodities.
B. the expected returns will be more correlated to bonds than equities.
C. he could invest in commodities funds.
D. commodities with a negative correlation to his equities will increase the diversification within his
portfolio.
C,D
104
Elaine, an experienced investor, has diversified her portfolio into listed property company shares. She should be aware that listed property company shares
A. offer greater diversification than direct property investment.
B. will not be eligible for a stocks and shares ISA investment.
C. will never fall in value.
D. are affected by the quality of the company management.
A,D
105
Maarav has £90,000 in a buiding society deposit account and Pinar has £110,000 in a National Savings & Investments Direct Saver account. Both accounts offer the same rate of interest. When comparing the characteristics of the two accounts
A. Pinar’s account has a higher level of capital protection in the event of default.
B. Maarav’s account will be subject to a penaity upon early withdrawal.
C. Maarav’s and Pinar’s accounts will both pay interest on a gross basis.
D. Pinar’s account will not have voting rights.
A,C,D
106
Sam is considering a short-term money market fund and a standard money market fund. In respect of the main differences between them, he should be aware that
A. only the short-term fund has a weighted average maturity of no more than 60 days.
B. only the standard money market fund has a weighted average life of no more than six months.
C. both funds could hold commercial bills.
D. both funds could hold certificates of deposit maturing in one month.
A,C,D
107
Abel holds preference shares in a listed company and Handan holds ordinary shares in the same listed company. As a consequence
A. both of them will automatically be entitled to vote at the company’s general meetings.
B. Abel is more likely to receive a higher income stream than Handan.
C. both of them rank behind the company’s bonds in the event of liquidation.
D. both of them are likely to be entitled to convert their holdings into other types of share offered
by the company.
B,C
108
Shirley invests in a number of gilts and corporate bonds. When comparing these
A. gilts are always less volatile than corporate bonds.
B. corporate bonds are always classed as sub-investment grade.
C. investors requiring ultra-long duration would favour gilts rather than corporate bonds.
D. a requirement for a higher yield would favour corporate bonds over gilts.
C,D
109
What are the usual characteristics of a company traded on AIM compared to the FTSE 100 Index?
A. It has a wider share price spread.
B. It has smaller market capitalisation.
C. It will have lower share price volatility.
D. It will have lower returns.
A,B
110
Harvey owns ordinary and convertible preference shares in the same listed UK company. He should be aware that
A. if the company’s profit improves, both shares should increase in value.
B. if the company’s profit falls, both shares will decrease in value.
C. if the company fails, the convertible preference shares rank higher than the ordinary shares.
D. the price of the convertible preference shares will be influenced by the price of the ordinary
shares.
A,C,D
111
Joichiro has been advised to include UK-listed Exchange Traded Funds (ETFs) tracking the FTSE All- Share Index in his investment portfolio. He should be aware that ETFs
A. tend to be more expensive than actively managed funds.
B. do not incur Stamp Duty Reserve Tax on purchase.
C. are priced and traded once every business day.
D. have a low tracking error in comparison to their index benchmark.
B,D
112
Doreen is considering investing in a structured product. The use of a futures contract within the product means that
A. the product can always be encashed at any time without penalty or financial loss.
B. she may be exposed to counterparty risk.
C. she will always receive at least a full return of capital at maturity.
D. she may receive greater returns than those achieved by the underlying index.
B,D
113
Ian is considering National Savings & Investments (NS&I) Income Bonds and Jenny is considering NS&I Premium Bonds. When comparing these products
A. only Income Bonds pay out a rate of interest.
B. the maximum investment in Premium Bonds is £40,000.
C. Ian and Jenny could purchase both products on a joint basis.
D. Ian and Jenny would both be able to withdrawal their money without penalty.
A,D
114
Priya is considering a junior ISA (JISA) for her son Shaan, aged 14. She should be aware that
A. she may transfer Shaan’s existing Child Trust Fund into a JISA.
B. she may invest in both cash and stocks and shares components of a JISA.
C. Shaan assumes responsibility for the account at age 16.
D. the JISA allowance forms part of her stocks and shares ISA allowance.
A,B,C
115
Frank, a non-taxpayer, has an investment bond. He is considering switching his existing equity and fixed interest funds into a property fund. He should be aware that
A. the new fund is likely to have significant holdings in commercial property.
B. the value of the property fund’s assets may be established by regular professional valuation.
C. encashment of the property fund may sometimes be suspended for several months.
D. he can reclaim the tax on income and gains deducted internally with the fund.
A,B,C
116
A retail client is considering investing in hedge funds. He should be aware that
A. higher charges are likelytoapply than to traditional investment funds.
B. a wide range of investment methods may be employed.
C. liquidity risk is not an issue.
D. derivatives may be used for more than just efficient portfolio management.
A,B,D
117
Sanyu, a higher-rate taxpayer, has invested in a Real Estate Investment Trust (REIT). In respect of the income payments from the REIT he should be aware that
A. he will not be subject to further taxation on any property income distribution he receives.
B. he may offset any dividend payments against his dividend allowance.
C. if held within a stocks and shares ISA, Sanyu will be able to receive the property income
distribution on a gross basis.
D. the dividend income will be paid net of 20% withholding tax.
B,C
118
Adam has owned a small number of direct equities, but now wishes to follow his financial adviser’s recommendation to invest in collective funds. This will enable Adam to
A. choose which shares will be in his portfolio.
B. receive professional fund management.
C. gain exposure to a maximum of 50 different underlying investments per fund.
D. reduce the non-systematic risk.
B,D
119
90. David is considering the purchase of an Exchange Traded Note (ETN) or an index tracking open-ended investment company (OEIC) as a way of investing in the FTSE All-Share Index. In comparing them, he should be aware that
A. the funds may use different methods to generate returns from the same index.
B. ETNs usually carry counterparty risk.
C. only the OEIC can be held in a stocks and shares ISA.
D. both can be traded on a real time basis.
A,B
120
The main reasons for using the Sharpe ratio when calculating a portfolio’s performance are
A. it is an indicator of the portfolio’s risk adjusted return.
B. it will always be quoted on a rolling quarterly basis.
C. it analyses market movement only, removing manager risk.
D. the higher the number, the more a portfolio manager can be said to have added value.
A,D
121
The time-weighted rate of return of an investment portfolio
A. is always higher than the money-weighted rate of return.
B. is calculated by separately determining individual discreet returns.
C. assumes an even flow of money in and out of the portfolio.
D. can only be used to measure periods of up to 12 months.
E. is determined by compounding the returns of sub-periods.
B,E
122
Neil’s investment manager has recommended a switch of investments to rebalance his portfolio. Therefore
A. Neil’s risk profile must have become more cautious.
B. it is possible that the switch will result in a Capital Gains Tax liability.
C. Neil’s portfolio is guaranteed to become more tax efficient.
D. Neil would always buy more of the worst performing asset.
E. Neil could see his best performing asset sold.
B,E
123
An independent financial adviser firm offers both advisory and discretionary management services. When comparing these
A. only the advisory service requires a client’s approval before making a purchase.
B. the advisory service will always have a lower level of adviser charge.
C. the discretionary service will always include a wider range of investments.
D. both services must act in accordance with the client’s agreed investment objectives and level of
risk.
A,D
124
A fund’s portfolio return is 15%, compared to a benchmark return of 7%. The tracking error is 6%. Therefore, when applying the information ratio (IR) to evaluate this performance the
A. fund is likely to have outperformed the sector average fund.
B. fund is more likely to be managed on an active rather than passive basis.
C. IR is 0.36.
D. risk-free rate of return is required in order to calculatethe IR.
A,B
125
When evaluating performance, a financial adviser would use the time-weighted return to
A. calculate the beta of the highest performing stocks within a portfolio over a given period.
B. calculate the alpha derived from a manager’s stock picking skill as opposed to the market return.
C. compare the performance between portfolios from different managers.
D. identify a portfolio’s overall return from several different sub-periods.
C,D
126
Ivor, a portfolio manager, provides an advisory management service to Richard, covering both investments trusts and direct equities. In respect of the ongoing maintenance of Richard’s investments trusts
A. the investment trusts should be switched into direct equities once the ir value reaches £50,000.
B. Richard is likely to have less administrative involvement with the investment trust than with the
direct equities.
C. the investment trusts and direct equities will have the same beta values within the portfolio.
D. Richard has to give agreement before Ivor can purchase additional direct equities.
B,D
127
When using alpha in order to assess and evaluate portfolio performance, a financial adviser should be aware that
A. alpha can be a measure of a fund manager’s stock picking skills.
B. alpha is the output derived from the Capital Asset Pricing Model (CAPM) equation.
C. alpha cannot be used where the investment is a fund of funds.
D. a positive alpha indicates that the portfolio is likely to have outperformed the market return.
A,D
128
Roger’s portfolio is entirely invested in UK unit trusts and open-ended investment companies (OEICs). He is discussing with his financial adviser the merits of restructuring his portfolio by switching some capital into UK equity investment trusts. Roger should be made aware that
A. switching from unit trusts is a much more costly exercise than switching from OEICs.
B. his overall annual management charge is likely to rise significantly when he adds investment
trusts to his portfolio.
C. investment trusts may be purchased for more than their net asset value.
D. once he restructures, his portfolio could benefit from the effects of gearing.
C,D
129
A financial adviser is reviewing the investment portfolio of a new client. The client is unhappy with the portfolio’s performance. The adviser should
A. determine if there have been any changes to the client’s original objectives.
B. ignore the existing asset allocation and reconstruct the entire portfolio.
C. switch the portfolio into cash pending his response to the client.
D. re-establish the client’s attitude to risk.
A, D
