Learning Outcome 8 - 8 standard questions / Understand the principles of investment planning

Question 1

Which portfolio management style is more volatile: top down or bottom up?

Answer 1

Bottom up

Question 2

What is the aim of successful portfolio construction?

Answer 2

Achieve diversification on the basis that this should reduce risk

Question 3

What is the order of constructing a portfolio using the top down investment management method?

Answer 3

1. Asset allocation within worlds regions
2. Sector weightings (e.g 5% mining, 2% pharmaceuticals)
3. Stock selection within the sectors

Question 4

Which levy fees are higher: active or passive funds? And why?

Answer 4

Active

Because they need to demonstrate that they are seeking value

Question 5

Which method pays attention to index benchmarks? Top down or bottom up?

Answer 5

Bottom up

Question 6

When following a top down investment management approach, what is the last consideration?

Answer 6

Stock selection

Question 7

What are the 4 most widely recognised fund management styles?

Answer 7

1. Value
2. GAARP
3. Momentum
4. Contrarianism

Question 8

Which type of fund management style believes that using deep and rigorous analysis, it can identify businesses whose value is greater than the price placed upon them by the market?

Answer 8

Value

Question 9

Managers of equity income or income and growth funds, often adopt which style of fund management?

Answer 9

Value

Question 10

What is the oldest style of fund management dating back to Warren Buffets 1930s mentor Benjamin Graham?

Answer 10

Value

Question 11

Which style of fund management is mainly used by active growth managers?

Answer 11

GAARP

Question 12

Which fund management style is based on finding companies with long-term sustainable advantages in terms of their business franchise, quality of management, technology or other specific factors?

Answer 12

GAARP

Question 13

What do proponents argue in favour of with the GAARP fund management style?

Answer 13

That it’s worth paying a premium price for a business with premium quality characteristics

Question 14

Which fund management style to ‘middle of the road’ fund managers tend to adopt?

Answer 14

Momentum

Question 15

‘Sector rotation’ where sectors are expected to perform well at particular points in the economic cycle is an example of which style of fund management?

Answer 15

Momentum

Question 16

Which fund management style says that study shows there is a small tendency for both good and bad performance to persist, but cannot show that it generates enough return to compensate for trading costs?

Answer 16

Momentum

Question 17

Contrarianism is a fund style used most often with which type of fund manager?

Answer 17

Hedge fund

Question 18

What does the contrarianism fund manager believe about the average opinion from other fund managers?

Answer 18

That they are usually wrong and that high returns can be achieved by going against the trend

Question 19

Of the 4 most recognisable fund management styles, which one more difficult and risky?

Answer 19

Contrarianism

Question 20

How can a fund manager lock in positive returns if not separating beta and alpha?

Answer 20

By purchasing index put options

Question 21

‘Top-down investment management’, is driven by…

Answer 21

economic analysis

Question 22

‘Bottom-up investment management’, is driven by…

Answer 22

stock selection

Question 23

What are the 3 types of Sharia compliant funds?

Answer 23

Equity
Commodity
Ijarah

Question 24

An investor might consider investing in an offshore investment bond because:

a. the product should have lower charges than an equivalent onshore bond.

b. the fund should grow more than the equivalent UK investment bond.

c. gains are tax free.

d. both income and gains are tax free.

Answer 24

the fund should grow more than the equivalent UK investment bond

Question 25

Which planning tool planning tool explains to the client a range of possible investment outcomes that are based on different future asset allocations?

Answer 25

Stochastic modelling

Question 26

What does it mean when a fund manager uses an 'overlay' strategy?

Answer 26

A core share portfolio is held Derivatives are used to alter currency and market exposures

Question 27

Optimisation strategy tends to be based on assumptions; true or false?

Answer 27

True

Question 28

Which makes more assumptions; stochastic modelling or optimisation?

Answer 28

Stochastic

Question 29

To limit the volatility in a portfolio, is an adviser more likely to recommend passive or active fund management?

Answer 29

Passive

Question 30

Environmental, social and governance [ESG]. Which index would the adviser likely recommended to track?

Answer 30

FTSE4Good Index Series

Question 31

Which type of portfolios can be constructed using sets of asset classes using historic data for returns and volatility?

Answer 31

Theoretical

Question 32

A structured product that gives a guaranteed return of 120% of the FTSE 100 Index or full return of capital if the index is lower at redemption. Is this hard of soft protection?

Answer 32

Hard

Question 33

A structured product that provides an income of 7% annually with a full return of capital unless the index falls by 50% or more, in which case capital loss is on a pro rata basis. Is this hard of soft protection?

Answer 33

Soft

Question 34

When constructing a new portfolio, a manager selects the geographic area and then selects the sectors in which to invest. What method of investment management is this?

Answer 34

Top down

Question 35

What is meant by pragmatic and theoretic approaches to asset allocation?

Answer 35

Pragmatic = historic date used as a reference point Theoretic = maths uses to create optimised portfolios

Question 36

What is mean reversion?

Answer 36

Adjustment of both volatility and returns Combining theoretical and pragmatic approaches

Question 37

Portfolio optimisation uses which modelling technique?

Answer 37

Stochastic

Question 38

Which portfolios are said to be optimal?

Answer 38

Ones that generate the best returns that match the clients risk profile

Question 39

MPT says that active tactical asset allocation is not consistent with MPT. True of false?

Answer 39

True