September 2022 Flashcards
Calculate, showing all your workings, the expected return for the portfolio, based
upon the Capital Asset Pricing Model (CAPM).
(4.3 - 3.75) = 0.55
1.25 x 0.55 = 0.6875
3.75 + 0.6875 = 4.4375 = 4.44
Based upon the data in Table 1 and your answer to part (i) (CAPM 4.44), comment on the relationship between the figures used in the CAPM equation and Yoav’s
attitude to risk and objective.
- Beta above 1/excess market risk.
- Outside AtR range.
- CAPM doesn’t account for charges.
- Gap between target return and expected return/target return above expected
return.
State and explain briefly the two central principles of the CAPM.
- Non-systematic/specific risk can be eliminated/diversified;
- is not rewarded.
- Sensitivity to systematic/market risk;
- dictates expected return.
State four benefits and four drawbacks of using the CAPM
Benefits
Candidates would have scored full marks for any four of the following:
* Easy to use/calculate.
* Robust/proven/trusted.
* Allows for systematic/market risk.
* Ignores non-systematic risk/assumes it has been removed.
* Output is the expected return/easy to compare.
Drawbacks
Candidates would have scored full marks for any four of the following:
* Risk-free rate may not be suitable/correct.
* Assumptions can be unrealistic/the market return may be different.
* Assumes beta as the correct/suitable measure of market risk.
* Beta is unstable.
* Doesn’t include costs and charges.
* Assumes single holding period/one-size fits all.
* Theoretical/single factor/simplistic.
Describe briefly what is measured by Macaulay duration
- Weighted
- average term;
- in years;
- for purchase price to be repaid;
- by cash flows/coupons
- and redemption value.
Describe briefly what is measured by modified duration
- Sensitivity;
- of bond’s price;
- to changes in interest rates/yield to maturity.
State three factors Edyta should be aware of when assessing Macaulay duration
figures across different bond funds.
- Macaulay is relative/can be used to compare funds.
- Affected by coupon/price.
- Becomes less accurate as change in yield increases.
- Assumes linear relationship between interest rate and bond price.
- May not reflect fund style/mandate.
List three Investment Association (IA) sectors that may be suitable benchmarks
to use solely for the UK sterling fixed interest asset allocation of the portfolio.
Assume there is no exposure to gilts.
- Sterling Corporate Bond.
- Sterling Strategic Bond.
- Sterling High Yield.
Identify five main economic factors that may result in an increase in interest rates.
- Business/economic cycle.
- Expansionary fiscal policy.
- Tightening monetary policy.
- QT/unwinding QE.
- Rising inflation.
- Currency weakness/economic imbalance.
- Market forces/credit spreads widening/UK downgraded.
Comment on the alpha of the UK Opportunities OEIC fund and state four likely
reasons to explain the figure.
- Manager has not added-valued/active management not justified/better off
passive. - Investment style/underlying stocks out of favour/poor stock selection.
- Annual/short-term measure/calculation period for alpha.
- High PTR/transaction charges.
- One-off event.
- Smaller companies/sector has higher volatility.
Comment on the correlation figure for the two OEIC funds and its impact upon
the equity component of the portfolio
- Correlation is strong;
- positive.
- Will increase returns in rising market.
- Will increase volatility/market risk;
- as betas are more than 1.
- Will reduce diversification.
Identify three main risks specific to investing in equities on a passive basis using
ETFs and state one reason for each risk identified.
- Market/Systematic Risk.
- Limited protection in falling market/will follow market down/cannot hold
cash. or No ability to outperform in rising market/will only deliver market
return. - Style Risk.
- Replication strategy may cause underperformance/tracking error/drift from
index return. - Counterparty Risk.
- Failure of counterparty provider.
State six fund-related factors that Edyta would consider when deciding whether
to invest solely on an active basis.
- Costs/charges.
- Fund/ style/objective/mandate.
- Alpha/outperformance/past performance.
- Volatility/standard deviation.
- Sharpe/Information ratio.
- Investment house reputation/financial strength.
- Manager experience/track record.
- Dividends/yield.
Identify five potential economic consequences of the current account and capital
account being in deficit over the medium to long-term.
- Rising interest rates.
- Economy growth falls.
- Currency devaluation.
- Capital flight out of UK.
- Unemployment rises.
- Increase borrowing/debt-dependence/reliance on foreign currency reserves.
- Inflation increases.
State the main conditions that must be met for a property fund to qualify as a property
authorised investment fund (PAIF).
- At least 60% of net income;
- from exempt property business/ringfenced.
- Value of property must be at least 60%;
- of total assets.
- Must pay 3 types of income.
- Shares widely held.
- No corporate investor;
- holding 10% or more of NAV.
Identify five likely reasons for the level of fall in value of the NextGen Payment
Solutions fund over the most recent statement period.
- Economic/business cycle downturn.
- Increase in interest rates/inflation/discount rates.
- Higher beta/volatility/standard deviation.
- Poor stock-picking by manager.
- Tech/growth out of favour/sector rotation.
- Exposure to unlisted companies/deemed illiquid.
- One off event causes write-down/devaluation of underlying assets
Calculate, showing all your workings, the compound annual return of NextGen
Payment Solutions for the period from Martim’s original investment into the fund
until the latest end valuation.
(£11,780 / £5,000) = 2.356
∜ 2.356 or 2.356 ^1/4 or 0.25 = 1.23892159
-1 x 100 = 23.89%
Calculate, showing all your workings, the Sharpe Ratio for NextGen Payment
Solutions fund for the period shown in Table 1.
[(£11,780 - £19,000) / £19,000] x 100 = -38%
(-38% - 0.9%) = -38.9%
(-38.9 / 10.4) = -3.7403846 = -3.74
Outline why a volatility managed fund could be a suitable investment for
Martim.
- In line with AtR.
- Provides diversification within a small portfolio.
- Could reduce market/volatility risk/hedge against market fall.
- Sufficient time horizon.
- Known/target level of volatility.
State five main administration benefits to Sandra of consolidating her existing
investment assets onto a platform.
- In one place/single view.
- Access to tools.
- Auto ISA.
- Consolidated tax statement/voucher.
- Less administration.
- 24 7/on demand access/view online.
Calculate, showing all your workings, the return on capital employed (ROCE) for
Best Guest.
£2,955,000 + £3,735,000 = £6,690,000
(£620,000 / £6,690,000) = 0.09267
x 100 = 9.27%
Comment, based upon your answer to part (i) above (9.27%), on the ROCE for Best Guest compared to that of Rockflour Boutique and identify two factors that would
contribute to the difference in ROCE figures. Assume that Rockflour Boutique has
a ROCE above 20%.
- Rockflour has used capital more efficiently/Best Guest has used capital less
efficiently. - Rockflour has higher operating profit/Best Guest has lower operating profit.
- Rockflour has lower long-term liabilities/Best Guest has higher long-term
liabilities.
Explain briefly the drawbacks of Sandra using ROCE as a metric when comparing
Best Guest and Rockflour Boutique.
- ROCE is a single metric/single period/need to compare over time/doesn’t
factor in when funds are raised over period - Affected by one-off factors/distorted by high cash/doesn’t account for current
liabilities/doesn’t account for depreciation or amortisation. - Sandra is a shareholder only/ROCE calculates return for all
sources/shareholders and creditors.
Calculate, showing all your workings, how much of the £120,000 chargeable gain
Sandra could invest into a new EIS to maximise the Income Tax relief available in
the current tax year. Assume Sandra has the full personal allowance available
and the dividends she receives are less than her dividend allowance
£12,570 x 0% = £0
£37,700 x 20% = £7,540
£19,730 x 40% = £7,892
Total/Income Tax liability = £15,432
Maximum investment = (£15,432 / 30) x 100 = £51,440
