Investments Flashcards
(143 cards)
1
Q
Advantages of using ETFs compared to actively managed portfolio’s
A
. Actively managed funds tend to fail to outperform index tracking funds over the Medium to long term.
. ETFs trade throughout market opening hours
. Lower cost than actively managed funds
2
Q
The effect of warrant holders converting warrants to shares
A
. The share price will reduce because the NAV per share will reduce
. Warrant holders pay less for each share than the price at which they are trading, thus diluting the value of the holding if it is priced below NAV
3
Q
Sharpe Ratio Calculation
A
. Return on investment - RFR divided by Standard Deviation
4
Q
Derivatives or instruments used to hedge
A
. Futures . Put Options . CFDs . Spread Betting . Short ETFs
5
Q
The 4 main factors which can influence interest rates
A
. Economic Cycle
. Government or Central bank policy
. Inflation Expectations
. Preference for liquidity
6
Q
Information Ratio Calculation
A
. Portfolio return - Benchmark return divided by tracking error
7
Q
Advantages of structural products
A
. Defined Return
. Capital Protection in full or until a barrier is reached
. In some cases, geared returns greater than the index change
. Diversification within a broader portfolio
. ISA eligibility subject to certain conditions
. Tax planning the maturity date with annual CGT
8
Q
Structured products types - description
A
. Structured Deposits - designed to return capital as a minimum at maturity. They also have FSCS protection.
. Capital protected structured products - Designed to return capital as minimum at maturity. No FSCS protection.
. Capital at risk products - Return is based on benchmarked index performance.
9
Q
Multifactor Models
A
. The CAPM looks at a single factor whereas a multi factor model explains security returns by looking at a number of factors
. 3 steps of factor analysis:
> Specify a number of factors affecting historic data
> Measure investment Beta against each factor
> Measure the risk premium for each factor
10
Q
Limitations of the Efficient frontier
A
. The model is only successful if the inputs are accurate
. In a crisis, correlations are highly unstable, and correlations between equities tend to move towards 1
. Standard deviation is assumed to be the appropriate risk measure, other risks are not considered
11
Q
3 factors used in multi factor modes
A
. Economic factors such as oil price or inflation
. Fundamental factors such as P/E ratio, earnings growth or return on equity
. FAMA or French factors of company size and value
12
Q
Advantages of the ORB
A
. Accessible to individual investors not just institutions
. Smaller investment amounts allowed, £1000 is typical
. Prices for bonds can be seen on screen
. Steady flow of new issues, including index linked bonds
. Standardised settlement times of T1 or T2
. The minimum price movement is standardised at 1p
. All bonds on ORB or London listed securities and have been admitted to the main market, with a corresponding level of regulatory oversight
13
Q
Advantages of adding commercial property and real estate to portfolio’s consisting of equities and bonds
A
. Diversification
. Commercial can offer higher returns than average bonds and equity
. Commercial can offer higher levels of income
. Absolute returns have tended to outperform traditional long only funds when markets are weak
. Can adopt some but not all hedge fund strategies
. Onshore funds are regulated and more transparent than some hedge funds
14
Q
Calculating Standard deviation
A
. 1 (SD) - 68.3% or 2 (SD) 95.5% X SD = X
. Portfolio return - X/ Portfolio Return + X = Range
15
Q
Disadvantages of High Yield funds
A
. Income is not guaranteed and so it could fall
. Income is unlikely to keep pace with inflation
. In many high yield bond funds, charges are deducted from capital
. The value of the funds can fall as well as rise
16
Q
What needs to be factored in for Optimisation models using efficient frontier
A
. For all assets an investor can invest in, you should forecast:
> The return from each asset
The risk of each asset
The correlation between each pair
. Establish max return for risk being taken
17
Q
Factors to consider when investing in structured products
A
. The underlying index
. Tax treatment of the product - CGT or income tax
. The gearing offered by the product
. Capital protection terms
. Type of barrier being used e.g. American or European
. How initial and final stock levels are determined
. Credit rating of the counter party
. The investment lock in period
18
Q
ETCs
A
PHYSICAL
. Holds the physical commodity it is tracking
. Holding the commodity means storage and insurance costs
. Most ETCs do not hold the physical asset
SYNTHETIC
. Performance based on forward futures of chosen commodity
. No storage or insurance costs
. Carries counter party risks
19
Q
Calculating the redemption yield
A
. Divide the amount of premium to par, by the number of years left of the gilt
. Divide this figure by the current price of the gilt and x by 100 to get the annual reduction %
. Deduct the annual reduction % from the running yield to get the yield to redemption for premiums, or add for discounts
20
Q
Advantages + Disadvantages of the holding period return
A
ADVANTAGE
. It looks at the total return, including income that is not reflected in the capital return numbers
DISADVANTAGE
. It is not an annualised number and does not include reinvestment of income
21
Q
Advantages of investing in onshore absolute return funds compared to fund of hedge funds
A
. Regulated funds (onshore) offer investor protection
. Onshore absolute return funds can pursue a lot but not all of the same strategies as hedge funds, they are though restricted on the level of overall risk.
. They also provide at least fortnightly liquidity
. They are cheaper
22
Q
What Alpha means
A
. The difference between the expected return from a security given its Beta, and its actual return.
The part of the return which cannot be explained by market movement alone
. It measures both under and out performance
. Positive Alpha indicates positive performance
. Negative Alpha indicates negative performance
23
Q
Calculating the running Yield
A
Coupon divided by the Gilt price x 100
24
Q
Disadvantages of utilising a Lifetime Annuity
A
. Low rates compared to nursing home fee’s
. No capital returned on death unless capital protected
. They are inflexible, you can’t change your mind once bought
. The value of a level annuity may be eroded by inflation
. Capital protection and escalation options reduce the initial income
25
Advantages of using a lifetime annuity
. Provides a guaranteed income
. Fixed Income - for life if lifetime option chosen
. Escalating annuities could help meet the cost of rising nursing home fees
. Part of the payment is deemed to be return of capital, and this element is not deemed to be subject to income tax
. can avoid tax liabilities if the income is paid directly to the care home
26
Typical basis of a structured product
. Structured deposits
. Capital protected
. Capital at risk products
. Terms of structured product
. Restrictions on participation
. Barrier at which point the investors capital is at risk
. Kick out or auto call feature allowing investment to mature early.
27
Advantages of investing in foreign commercial property via an off shore closed ended fund
. Would struggle to find a Uk fund that directly invests in european property, as their focus is the UK
. Closed ended means there should be no redemption problems
. The offshore company structure usually allows gearing
28
Calculating expected return
. Number of shares x Share price = Value
. CAPM x Value divided by total of all values
29
Jensens Alpha
. Jensens Alpha is the difference between the return forecast by CAPM and the actual return
. Shows return generated by fund managers decisions
. The higher the Alpha is the better the manager has done
. A portfolio can have a positive alpha but generate a negative return due to the underlying market
30
Dividend Cover
Post tax profit per share divided by Dividend per share
31
Reasons why a share may show a high Dividend Yield
. little expectation of future dividend growth
. Expectations of a dividend cut
. Expectations of losses or even insolvency
. High div to compensate low or negative capital growth
. Maintain dividend paying record to dissuade income seekers
. Based on historical information
. A special dividend may have been paid, with the current price indicating expectations of no further such dividends
32
New VCT rules
. No longer able to invest in companies over 7 years old unless they are a knowledge intensive company, which can be invested into up to 10 years old
. No longer able to invest more than £12m into a company unless they are a knowledge intensive company, which can be invested into up to £20m
. VCT funds cannot be used to help existing management fund a buyout of shares from a founder or other major share holder
33
Tax treatment of VCTs
. Dividends are free of tax
. 30% income tax relief if held for 5 years or more
. Free of CGT
34
Advantages of high yield funds
. Generates higher income yield than equities
. Gives choice of payment frequencies
. Can be liquidated easily at any time
. Interest is paid net, but tax is reclaimable
. the funds are actively managed
35
Employee revenue productivity
. revenue divided by number of employee's
36
Working capital ratio
.Current assets divided by current liabilities
37
Return on capital employed
. Operating profit divided by equity and long term borrowings
38
Covered call options
. You can sell a covered call and receive a premium for doing so
. If the stock price is at or below the strike price then the holder abandons the option, leaving the seller with the premium
. If the price of the stock rises above the strike price, then the option will be exercised and the value of any growth will be lost
39
Ongoing charges fund
INCLUDED:
. AMC
Other expenses: Registration, Custodian, Auditor or Legal fee's
EXCLUDED:
. Performance fee
. Platform/advisor charges
. Transactional/Brokerage fee's
. PTM/Stamp duty
40
MWR calculation
. (income paid out + final value) - (initial value + additions) divided by (initial value + additions) to the power of (x/12 months) x 100
41
What does the P/E ratio represent
. The P/E ratio represents how many times the current years post tax profits or earnings the market is prepared to pay for the company
. Indicated the health of a company
. Can indicate future dividends
. Provides a useful comparison with other companies in the sector
. Indicates further growth prospects - High P/E = High growth potential
. Sometimes a PE and be high because a companies earnings have temporarily fallen
42
Calculating undiluted discount for NAV
. Share price - NAV per share + X
. X divided by NAV per share x 100
43
P/E ratio
. Current share price divided by post tax earnings per share
Alternatively
. Current Market capitalisation divided by Total post tax profits for the year
A low P/E suits a value investor
44
Why do investments trade at a discount to NAV
. Supply and demand
. poor performance
. Management changes
. Illiquidity
. Out of favour sector
45
Calculating Alpha
. Portfolio return - CAPM
46
Assumptions of CAPM
. Investors make rational decisions based on risk
. All investors have the same time horizon
. No single investor can affect market prices
. There are no taxes, transaction costs or restrictions on shorting
. Info is free and available to all investors
. Unlimited sums can be deposited or borrowed at the RFR
. All investments are fully marketable
47
3 IA non gilt sterling bond sectors
. Sterling corporate bond fund:
> Must be 80% denominated in sterling
> BBB- or above
> 80% excludes: Prefs, PIBS or convertibles
. Sterling High Yield:
> Same as above except BBB- or below
. Sterling strategic bond fund:
> Same as above but no rating requirement
48
2 stage NAV
. Net assets divided by shares in issue = NAV per share
. Share price divided by NAV per share
49
Net redemption Yield
. Gross income - tax divided by investment x 100
50
Corp bonds allowed in S+S ISA's by HMRC
. FCA authorised unit trust
. FCA authorised UK OEIC
. A UCIT retail scheme that should be:
> A unit trust or an OEIC
> Authorised by the FCA for UK retail sale
> Not subject to limited redemption provisions
. A non UK UCITS fund which is a recognised scheme under the FSMA 2000 act
51
REIT Eligibility
. REITS must be resident in the UK for tax purposes
. Must be closed ended
. Listed on a recognised exchange
. Issue only 1 class of ordinary and preference shares
. Distribute 90% of taxable income to investors each year
. 75% of profits and gross assets must come from property rental business
. must be a closed company with 5 or fewer participants
. contain at least 3 properties
. 1 property cannot represent more than 40% of the entire business
. The profit to financing ratio must be less than 1.25
52
Direct corp bond vs Corp bond funds
ADV of Direct:
> Lower cost no manage meant fee's
> Income is known and fixed
> Certainty of return/capital back at maturity
> Control and transparency of where you are investing
> No CGT
```
DIS of Direct:
> No diversification, company specific
> No professional fund management
> Reinvestment risk when bond matures
> Less liquidity
```
53
Earnings per share
. Net Income - Dividends on preferred stock divided by Number of common shares outstanding/or average
. This represent the portion of a companies profit allocated to each outstanding share of a common stock
. Also serves as an indicator of a companies profitability
54
Market Capitilisation
. Number of shares in issue x the share price
55
Price over earnings
. Profit for the year divided by the number of shares = X
. Share price divided by X
56
Operating return on assets
. Bit divided by average total assets
. Shows the % of profit a company earns in relation to its overall resources
57
Gearing Ratio
. Total debt divided by net assets
. Measure the proportion of a companies borrowed funds to its equity
. The ratio indicates the financial risk to which a business is subjected, since excessive debt can lead to financial difficulties
58
Standard Deviation
. A measure of total risk
. Measure the volatility of an investment returns and reflects the volatility of the u underlying markets, plus the risk the manager has taken against the market by making active decisions.
. The standard deviation number indicates probability, assuming normally distributed returns
. There is a 68.3% probability that a return will be within 1 standard deviation
. There is a 95.5% probability that a return will be within 2 standard deviations
. Standard deviation measures past performance
59
Return on Assets
. Net income divided by average total assets
. Shows the % of profit a company earns in relation to its overall resources
60
Advantages of listing on A.I.M.
. No minimum market capitalisation
. No trading record requirements
. No requirement for a minimum number of shares to be held in public hands
. Fewer admin and reporting requirements/less regulation
. Lower costs than main market
61
Interest Cover
. Profit before interest and tax divided by interest payable
. Shows how easily a company can pay their interest expenses on outstanding debt
62
Dividend Yield
. Dividend per share divided by share price
. Show how much a company pays out each year relative to its share price
Alt Calc
. Total dividend payout for the year divided by the Current market capitilisation
63
Return on Equity
. Net Income divided by average total equity
. The amount of net income returned as a result of share holders equity
. Can be used to measure a companies profitability
64
Net profit margin
. Net Income divided by Revenue
. Shows % of revenue left once all expended have been deducted from sales
. Reveals the amount of profit a company can abstract from total sales
65
IPO vs Established company
ADV of IPO:
> Attractive share price
> Low cost/no dealing commission
> Limited supply, possibly creating demand later
DIS of IPO:
> No track record, so difficult to analyse
> Companies come to an IPO holding all the cards
> Less onerous reporting requirements for companies
> Allocation can be scaled back if over subscribed
> Short term price volatility after listing
66
Cash ratio
. Cash + Marketable investments divided by Current liabilities
67
Current ratio
. Current assets divided by Current liabilities
68
Quick Ratio
. Current assets - inventory divided by Current Liabilities
69
Operating profit margin
. EBIT divided by revenue
Alt
. Operating profit divided by revenue
. This is used to measure a companies pricing strategy and operating efficiency
. This measures what proportion of a companies revenue is left over after paying for variable costs of production such as wages and raw materials
70
return on common equity
. Net income - pref divs divided by average total common equity
. measures how much money a company generates from the monies shareholders invested
71
Working capital turnover
. Sales divided by average working capital
. Indicates whether a company has enough short term assets to cover its short term debts
. Below 1 indicates negative working capital
. Over 2 means the company is not investing excess assets
72
BETA
. Measures a component of total risk
. Measures the systematic or market risk of the stock
. Average Beta of stocks in the market is 1
. If a stock has a BETA higher than 1 then it will be particularly sensitive to market movements and will most likely exaggerate them
. A stock with a BETA less than 1 tends to dampen market movements
73
The Information ratio
. Compares the relative returns achieved by a fund over its benchmark with the funds tracking error
. A positive Information ratio indicates outperformance
. A negative information ratio indicates under performance
. Tracking error is the standard deviation of relative returns, a tracking error of 5% would indicate that 68.3% of returns will lie within 5% of the average relative return
74
Disadvantages of investing foreign commercial property via an offshore closed ended fund
. Can be limited liquidity within wide spreads
. there is only a limited choice of funds
. The closed ended nature means that there is protection from forced property sales
. Gearing increases risk
. Charges can be high
. NAV - premium or discount, can both widen
. Currency risk
75
Risks associated with structured products
. They are exposed to market risk
. Counterparts risk
. Some have to be held until full maturity
. Fixed redemption dates make timing the market difficult
. The tax treatment of structured deposits is not particularly efficient for higher rate tax payers as profits are taxed as income
76
What does TWR measure
. Funds should be measured whenever there is a significant cash flow in or out
. Funds returns are then compounded to give overall TWR
. The TWR measure is the return of the investor who invested at the beginning of the time period
. TWR eliminates distortion of the timing of the cash flows
. This allows us to compare performance of managers or funds on a more equal footing
77
Advantages of investing in a FTSE 100 tracker rather than a SCARP
```
. No limit to upside if FTSE performs well
. Greater transparency
. Greater liquidity
. Dividend reinvestment
. Ability to plan tax
. Ability to partial sell
. No automatic kick out
. Covered FSCS
```
78
Why is deflation damaging for the economy
. It increases the real value of debt
. People will save rather than spend
. Prices will fall further/deflationary spiral
. Lower demand/ lower production/ increased unemployment
. Reduced profits
. Decreased investment
. Banks less likely to lend against falling asset prices
79
The features of a SCARP
. Early return of capital
. Early withdrawal penalties
. Tax issues at maturity
. Level of investor involvement
80
Risks of a SCARP
```
. Counterparty
. Capital
. Reinvestment
. Liquidity
. Opportunity
. Inflation
```
81
How to counteract deflation
. Reduce interest rates - stimulates demand
. Quantitative easing - Reduce borrowing costs
. Increase gov spending
. Reduce taxes - encourage lending
82
Limitations of the sharpe ratio
```
. Returns are not normally distributed
. Assumes SD is the correct measure
. Can be manipulated by changing the measurement interval
. Simplistic/ ignores other factors
. Ignores charges
. Uses historical data
```
83
Reasons why MWR may differ to ARR
. MWR is influenced by the timing of cash flows
. Not a straight line return
. May have been good performance in periods where less money was invested/ lower performance when more money invested
84
Methods that a fund tracking the FTSE 100 may utilise
. Full replication
. Sampling/ simplified stratification
. Optimisation/ Algorithm
. Synthetic/Derivatives
85
Annual rate of return
The performance in this example: 33%/3 years
((1.33/100) to power of 1/3 - 1) x 100 = 9.97%
86
Difference between UT's and IT's
```
. Open ended/ Closed ended
. PLC versus trust/ shares versus units
. Directors/ Trustee's
. Appoint investment manager/ in house manager
. Listed on a stock exchange/ not listed
. Single priced/ dual priced
```
87
Risks of investing in UK corp bonds
. Interest rate risk - Rising % rates reduce value of bonds
. Credit/default risk - Default on coupons or maturity
. Inflation risk - Returns eroded by inflation
. Reinvestment risk - maturing when % rates are low
. Political/legislation/tax risk - changes to any
88
Why would a bond price be significantly below a par price
. Company might be in trouble/ profits decrease
. May default on coupon
. May not pay the redemption value
. In a sector that is struggling/ out of favour
89
Why choose bonds that mature in different years
```
. Reduces reinvestment risk
. Reduces interest rate/ reinvestment risk
. Reduces risk of default
. To meet future liabilities
. Provides regular cash flows
. Diversification
```
90
Impact of increase in interest rates
. Bond prices fall
. By the same % of fall for each year of duration
. Yields go up
. the shorter the duration the less the price will fall
. the longer the duration the more the price will fall
91
Advantages and disadvantages of centralised investment proposition
Advantages
. Eliminates profit drift
. Removes advisor/ behavioural bias
. Matches/ Keeps in line with attitude to risk
Disadvantage
. One size fits all/ not bespoke
. Additional tax due to higher portfolio turnover
. Assumptions/past data underpinning model portfolio's may be wrong
92
What is meant by a centralised investment proposition
. Standard investment approach/ company specific
. Segmenting clients into risk categories/ objectives
. Model portfolio/ Asset Allocation
. Based on investment theory/ Stochastic modelling
. Rebalanced/ Periodically reviewed
93
Methods other than rights issues used to raise capital
. Placing/ Placement
. Private offer to large institutions/ sophisticated investors
. Open offer to existing share holders
. Similar to a rights issue/ existing share holders
. Offered new shares on a pro rata basis at a discount
. Shareholder not compensated if rights lapse
94
Why might a company have a rights issue
. To finance a specific acquisition/expansion/investment
. To reduce debt
. To strengthen the balance sheet
95
Purpose of using a benchmark in the investment process
. It sets asset allocation/ starting point
. It is independent/ a neutral agreed basis
. To manage risk expectations
. Provides measure of relevance
. Value added or performance by the manager
96
Causes of ETF tracking error
```
. Management fee
. Inaccuracy of tracking method used (sampling)
. Other expenses/costs
. Currency hedging
. Cash drag/uninvested cash
. Dividend reinvestment lag
. Tax/witholding tax
. Securities lending
```
97
What is meant by quality of earnings
. Accurately represents trading performance of business
. Not manipulated by accounting policies/ no one off items
. Strong free cash flow/ cash generation
. Performance repeatable/ sustainable/ dependable/ consistent
98
Measures in relation to employee's that you would look at to assess quality of management
. Staff turnover
. Absenteeism
. Profit per employee
99
Property vs fixed interest bonds in rising inflation
. Market value of bonds fall as inflation rises
. Maturity value eroded by inflation at redemption
. Real value of income eroded by inflation
. Both are fixed
. Diversification
. Property is a real asset/ capital increases with inflation
. Rental income revalued upwards with inflation
100
7 factors which determine the return on a commercial property fund
```
. Location
. Type of holdings (office, retail, industrial)
. Size of property/ Liquidity
. Rental Yield
. Tenant Quality
. Length of lease
. Void occupancy rates
```
101
Risks on disposal of OEICS investing in property
. Managers may not have sufficient cash to pay sellers
. Forced to sell property cheaply
. Smoothing out to protect remaining share holders
. Move to weekly valuations
. Apply dilution levy
. Apply fund dealing suspension
102
Risks on disposal of REITs
. Subject to supply/demand - as they are close ended
. A weak market could cause them to be heavily discounted/or discounted compared to NAV
. In extreme conditions REITs can become illiquid
103
Using lifetime ISA towards first home
. No withdrawal charge if:
. The house is worth less than £450k
. You are buying the home with a mortgage
. You use a conveyancer or a solicitor to act for you in the purchase, and the funds are paid directly to them by your lifetime ISA provider
. The ISA has to be open for atlas 12 months before withdrawal
104
Withdrawals and transfers from lifetime ISA's
. If you withdraw before 60 there is a 25% withdrawal charge - this also applies if you transfer the ISA before 60
. No charge if:
. Using towards first home
. Aged 60+
. Terminally ill, less than 12 months
. Transfer to another different lifetime ISA provider
105
Lifetime ISA's
. Government bonus of 25% of money put in
. £1000 max investment per year that gets 25% bonus
. Usual tax ISA rules apply
. Age range is 18-40 to open ISA
. Must be UK resident
. You can invest £4000 per year (but only £1000 gets bonus)
. Hold stocks, cash, shares, qualifying investments
. You can pay into until you reach 50
. You can keep the ISA open beyond the age of 50, but you cannot make any further additions to it
106
How is technical analysis used to make investment decisions
. It is based only on the share price and excludes fundamental analysis
. Uses charts of past share price
. Identifies patterns/trends to indicate future performance
. Assumes these are repeated
107
Differences in listing requirements between A.I.M. and main market
. No minimum capitalisation
. No minimum amount of shares held in public hands
. No trading history required
. Broader range of accounting standards can be applied
. AIM has a more relaxed reporting time frame
. AIM is higher risk
108
Advantages of a stock broker managed portfolio
. More diversification
. Wider availability of possible investments
. Managers expertise
. Less management administration
109
Advantages of own shares selection
. Control/involvement in investment decisions
. Concentrated portfolio can mean better performance
. Not subject to a managers short term performance pressures
. Lower charges
110
5 limitations of only using ratio analysis
. Changes in accounting policies over time
. Based on historic figures
. Financial statements contain subjective elements
. Need to compare to sector/peers/trends over time
. Cannot consider in isolation/need to look at other factors
111
Why could a company's P/E be different from the average
. Quality and consistency of earnings
. Expectations of future profits/earnings
. Exceptional items in the accounts
. Shares are overpriced
112
Forward P/E and trailing P/E
Forward:
. Uses future earnings/profit guidance
Drawback:
. It uses estimates, so is therefore subjective
Trailing:
Uses the last 12 months earnings/profit
Drawback:
Past performance cannot indicate future performance
113
Price over earnings
. Total profit divided by shares outstanding = profit per share
. The share price divided by profit per share
114
What is meant by value investing
. Identifying undervalued stocks
. Trading for less than their actual intrinsic/fundamental value
. The market is inefficient/overreacts to good or bad news
. Takes a longer term view
115
Risks of peer to peer lending
```
. No FSCS
. Lack of liquidity
. Default/Credit risk
. Counterparts/platform solvency risk
. New industry so no experience of how it may withstand and economic downturn
```
116
The factors that determine the price of an option
```
. Market value of the underlying asset
. Strike price - in or out of the money
. Export date/time to expiry
. Expected volatility
. Type of option - American or european
```
117
How may the bank of England issue gilts into the market
```
. Auction
. Tender
. Conversion
. Tap
. Syndication
. Repo
```
118
Tax on Gilts
. The coupons are taxed as income
. A basic rate tax payer has a £1000 tax free interest/personal savings allowance
. CGT free
119
Flat gilt yield curve
What does it mean:
. Longer dated bonds have the same interest rates as shorter dated bonds - the interest is not therefore expected to rise
Whats the result of this:
. It is expected that inflation will not increase
. Will cause slow economic growth/low economic growth
120
Risks associated with treasury gilts
. Interest rate risks - rising % rates reduce bond value
. Reinvestment risk - Finding another gilt that is similar
. Capital risk - Loss on sale or maturity
. Legislative/tax risk - changes in taxes or legislation
. Deflation risk - Income payments could fall
121
Why might a gilt have a negative yield to redemption
. High demand
. Expectation of rising future inflation
. Gilt trading above par after allowing for indexation since issue
. Low coupon does not offset real loss
122
How index linked bond coupons are determined
```
. Take RPI value
. X months prior to coupon date
. Divide by RPI set at issue date
. Apply to the coupon
. Divide by 2 as semi annual
```
123
Disadvantages of Food bond vs A bond on ORB
```
. Not tradeable, no liquidity
. Physical issues - food quality can deteriorate
. No market price or track record
. No disclosure or prospectus/no due diligence
. No ongoing regulation
. Cannot be placed in an ISA
. Small investment only
. No potential for capital gain
. Higher risk due to size of issuer
```
124
Behavioural biases that investors typically show
. Loss aversion - afraid to realise losses
. Endowment affect - Unwilling to change investments you own
. Present bias - Too much emphasis on short term outcomes
. Herding - Follow the crowd
. Over confidence - Over estimate own ability/knowledge
. Anchoring - Fixed on numbers they know have no relevance
. Regret theory
125
Risks of deposit based structures
. May receive no interest/return
. Inflation risk
. May be a penalty for accessing
. Counterparty risk
126
Risks associated with government bonds
. Economic - sever financial difficulty can impact on a bond
. Government/political - Political instability/raised taxes/confiscation of assets
. Credit/default - Non payment of capital or interest
. Currency - If foreign then the exchange rate can change
. Interest rate risk - Increase in interest rates can reduce price of the bond
. Liquidity - The bond may become more difficult to buy/sell
127
Criteria for selecting benchmark
. Should be specified in advance
. Agreed with client
. Priced at suitable periods
. There should be availability of historic data
. It should be transparent and unambiguous
. Relevant/appropriate to the investment objectives
128
Why are benchmarks used
. To provide independence and neutrality from which to assess
. Assess performance of investment manager
. Assess underlying contribution of asset allocation
. Assess stock selection
. To help agree and manage client expectations with regard to the portfolio's relative performance
129
How can a platform assist in rebalancing
```
. Can be automatic
. Can be manual
. Can be done at low or no cost
. Little admin/input
. Consolidated view
. Tools could help with tax planning
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130
How could adding a commodity index to an equity p/f help reduce the overall risk of the p/f
. Negative correlation to other assets
| . Diversification
131
3 types of borrowing other than from a bank that a REIT could utilise
. Loan stock/Convertibles/Corporate bonds
. Debentures
. Zero dividend preference shares
132
Reasons why 1 dividend yield may be higher than the other
```
. Recent fall in share price
. Expectation of dividend cut
. Expected future losses/insolvency
. Currency changes
. The underlying property yields more
```
133
Limitations in relying on price to earnings ratio
. The share price is set by the issuer and not dictated by the market
. The share price may change significantly after listing
. Based on historic earnings data
. Only one factor/leaves out other information
. Level needs to be considered relative to competitors
. Needs to be compared to past levels and trends
134
How is purchasing power protected by index linked bonds
. Coupon increases with RPI
. Capital increases with RPI
. RPI is a measure of inflation
. Obtained if bond held to maturity
135
EPS calculation
. Div cover x Dividend
. Dividend cover:
EPS divided by Dividend per share
136
Advantages of investing in a REIT rather than a BTL
```
. Part sell
. Smaller/regular investments
. Ease of admin
. Lower costs
. Diversification
. Greater liquidity
. Professional management
```
137
Premium to NAV
. Net value divided by number of shares = X
. Share price divided by X - 1 = answer
138
3 types of borrowing for a REIT other than from the bank
. Loan Stock
. Zero Div pref shares
. Debentures
139
Drawbacks of a REIT borrowing from a bank
. Covenant Requirements
. Shorter term
. Variable % rates, likely to increase
140
Critiscism of CAPM
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. Assumes you can borrow unlimited funds
. Assumes no taxes/charges
. Assumes investors are rational and risk adverse
. Assumes market is efficient
. Single factor model/only uses beta
. Based on historical data
```
141
Explain why Momentum, Size and Value factors are included in models
. Momentum - funds that have performed well over the previous 6-12 months tend to continue to outperform
. Value - Undervalued shares will outperform
. Size - Smaller cap companies will outperform larger cap
142
Adv of staying in current VCT rather than selling and investing in new VCT
. Any discount to NAV will have more time to close
. Shorter time period money is tied up for
. May be less risky
. Avoids costs of selling existing and buying costs of new shares
143
Dis of retaining existing VCT rather than buying a new one
. Could have liquidity issues
. May not achieve price expected
. Bid offer spread could widen/ share price could fall further
