R02 – Investment Principles and Risk
Practice Paper A
These questions relate to tax year 2016/2017
v2015
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Attempt to answer all questions:
1
Mark and Keith, who are civil partners, have deposits of £140,000 in joint
names with their bank. If the bank becomes insolvent, how much will they be
able to claim from the Financial Services Compensation Scheme assuming?
A
B
C
D
2
£75,000.
£85,000.
£100,000.
£140,000.
Jeff buys a flat for £220,000 to rent out and incurs purchase costs of £4,250. If
he receives £950 per month rent, what is his net yield ignoring ongoing costs?
A
B
C
D
4.24%.
5.08%.
5.18%.
5.28%.
An investor places £4,000 in a flexible cash ISA on 1st May 2016 and
withdraws £1,000 to pay for a holiday in July. How much additional money can
they place in the cash ISA before the end of the same tax year?
3
A
B
C
D
4
£12,240.
£12,000.
£11,000.
£11,240.
Agnes is buying her first home and Donald is moving to a new home and
remortgaging. Both are buying flats in the same block for £250,000. How much
more Stamp Duty Land Tax, if any, will Donald pay compared to Agnes?
A
B
C
D
5
None.
£1,250.
£2,500.
£7,500.
What is the running yield on a corporate bond paying 8.75% interest, bought
for a clean price of £128.50 against the par value of £100?
A
B
C
D
v2015
6.24%.
6.81%.
8.75%.
11.24%
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6
A stockbroker recently completed four UK-registered share purchases on the
same day:
Method
Crest
Crest
Stock transfer form
Stock transfer form
Purchase Price
£2,500
£5,000
£1,800
£7,150
What is the total combined amount of Stamp Duty and Stamp Duty Reserve
Tax due on these transactions?
A
B
C
D
7
£82.25.
£84.75.
£82.50.
£90.00.
A limited company has turnover of £1.09m and 500,000 ordinary shares in
issue. In the current financial year profits attributable to ordinary shareholders
are £285,000 and the dividend paid out was £0.11 per share. What is the
dividend cover?
A
B
C
D
8
3.82.
5.18.
9.09.
19.30.
What is the gross redemption yield on £100 of government stock with a coupon
of 7.25%, redemption in 6 years time and a market price of £121.50?
A
B
C
D
9
1.28%.
2.95%.
3.01%.
5.97%.
Which of the following best describes what a purchaser will receive when they
buy a fixed interest security with entitlement to a full six months interest?
A
B
C
D
v2015
Cum dividend
Ex dividend
The clean price
The dirty price
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10
When the running yield on a pooled investment is higher than the gross
redemption yield, this is likely to indicate the potential for:
A
B
C
D
11
Rising income.
Capital growth.
Falling income.
Capital erosion.
Lottie wants to follow the progress of the stock markets of Japan and South
Africa. Tracking which of the following indices would achieve her aims?
A
B
C
D
12
Topix and S&P Composite.
JSE and Hang Seng.
Dax 30 and S&P All Ordinaries.
Nikkei 225 and JSE All Share
Sandy, a basic rate taxpayer, rents out two of the bedrooms in her house for
£350 per month each and claims Rent a Room Relief. If the rent does not take
her into the higher rate tax band, how much tax, if any, will she pay on the
income?
A
B
C
D
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None.
£180.
£830.
£1680.
The main aim of the Bank of England Monetary Policy Committee is to:
A
B
C
D
14
Set interest rates to control inflation.
Maintain the value of sterling.
Ensure government targets are always met.
Protect consumers from market risks.
If the UK is entering the ‘Boom’ stage of the economic cycle, which of the
following is MOST LIKELY to happen?
A
B
C
D
15
The Bank of England base rate falls.
Share prices rise sharply.
Prices of fixed interest securities fall.
The rate of inflation reduces.
If the M4 measure of money supply is growing faster this year than last year
this may indicate:
A
B
C
D
v2015
Rising inflation.
Falling demand for loans.
Increased rates of direct taxation.
Deflationary pressure.
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16
If inflation is lower than government targets, how could monetary policy be
used to promote growth in GDP?
A
B
C
D
17
By reducing the rate of Corporation Tax.
By increasing the upper range of inflation targets.
By reducing interest rates.
By increasing government spending on help for businesses.
Philip has a fixed interest security he has held for four years during which time
interest rates have doubled. If interest rates do not return to previous levels,
what will happen to the nominal value of his investment at maturity next year?
A
B
C
D
18
It will rise substantially.
It will stay the same.
It will fall by the rate of inflation.
It will fall substantially.
The price of domestically produced goods compared with the price of the same
goods produced overseas gives a good indication of:
A
B
C
D
19
The balance of payments position.
A country’s competitiveness.
The global rate of inflation.
A country’s GDP growth.
An investment manager is constructing a portfolio of equities for a client using
Modern Portfolio Theory (MPT). This approach assumes that:
A
B
C
D
20
negatively correlated investments will produce the highest return.
diversification is less important than historic performance.
investors seeking income will accept more risk than those seeking growth.
investors would always opt for the least risk to achieve the same return.
An investment has a standard deviation of 4 and an expected return of 7%.
This means that:
A
B
C
D
v2015
68% of the time the maximum return is likely to be 11%.
95% of the time the return is likely to be between 0% and 11%.
68% of the time the minimum return is likely to be 4%.
95% of the time the return is likely to be between 3% and 11%.
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Hilary has the following investments:
Investment
Correlation
A
1.0
B
-0.4
If investment A falls by 5%, what is likely to happen to investment B?
A
B
C
D
22
It will fall by 4.6%.
It will fall by 2%.
It will rise by 2%.
It will rise by 7%.
The efficient frontier curve is designed to show the relationship between:
A
B
C
D
23
risk and reward.
diversification and income.
risk and diversification.
income and reward.
The market as a whole rose 2% yesterday. Which of the following is most likely
to have happened to the price of a security with a Beta of 0.8?
A
B
C
D
24
It rose by less than 2%.
It rose by more than 2%.
It fell by less than 2%.
It fell by more than 2%.
A financial adviser has recommended to his client several unit trusts that are
negatively correlated. This approach is most likely to have been taken to:
A
B
C
D
25
reduce taxation.
achieve maximum growth.
limit risk.
invest ethically.
A key limitation of the Capital Asset Pricing Model (CAPM) is that:
A
B
C
D
v2015
the Betas used can be unreliable as they rely on historic data.
it compares investors with different holding periods.
it can only be calculated using assets within the portfolio.
non-systematic risk is not taken into account.
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26
An asset manager is seeking to make a risk free profit out of what he sees as
the mispricing of an asset in the market. He is therefore using which of the
following theories?
A
B
C
D
27
Behavioural finance.
Sharpe ratio.
Information ratio.
Arbitrage.
A basic rate taxpayer places £12,600 in a fixed rate savings account that pays
4.1% p.a. gross interest for its three year term. What will be the balance of the
account at the end of the term if no withdrawals are made?
A
B
C
D
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£13,116.60.
£13,880.95.
£13,891.37.
£14,214.21.
A deposit account on which interest is compounded quarterly pays interest of
3.6% p.a. What will the AER be?
A
B
C
D
3.09%.
3.65%
3.69%.
4.50%.
A
B
C
D
How much would need to be deposited in a bank account paying 2% p.a. gross
interest to produce a lump sum of £10,000 in 6 years time?
£8,705.60.
£8,879.71.
£9.057.31.
£9,803.92.
29
30
Nula has invested directly in property and her sister Lita has invested in
Corporate Bonds through a collective investment. Which of the following is
TRUE?
A
B
C
D
31
Both Lita and Nula face interest rate risk.
Lita’s investment is less diversified than Nula’s.
Nula faces credit risk but Lita does not.
Nula faces greater liquidity risk than Lita.
An investor decides to sell his OEIC holdings and use the proceeds to invest
directly in FTSE100 shares. In doing so he is exposing himself to significantly:
A
B
C
D
v2015
reduced inflation risk.
reduced liquidity risk.
higher specific risk.
higher market risk.
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32
A private investor holds the following investments:
Corporate bonds through a unit trust
Units in a Venture Capital Trust
Shares in their UK Plc employer
Life assurance investment bond
Which investment represents the highest specific risk?
A
B
C
D
33
The shares in the employer.
The life assurance investment bond.
The corporate bonds.
The Venture Capital Trust.
Which of the following combinations of investments provides the lowest overall
risk, assuming an equal amount is invested in each area?
A
B
C
D
34
Life assurance bond, Investment Trust.
Gilts held to maturity, property.
Top 100 loan stock, mid 250 loan stock.
Unit trust, OEIC.
Dan’s stockbroker has recommended he borrows some money to take
advantage of an investment opportunity. This is an example of:
A
B
C
D
35
Hedging.
Gearing.
Arbitrage.
Pound cost averaging.
Which of the following actions taken within a portfolio will increase
diversification?
A
B
C
D
36
Switching holdings from investment trust shares to oil companies.
Selling holdings and re-buying them.
Investing in an additional market sector.
Switching holdings in a bank to an insurance company.
Which of the following investments is likely to be affected most by an increase
in inflation?
A
B
C
D
v2015
Gold.
Property.
Equities.
Deposits.
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37
A unit trust has the following mix of investments within the fund:
65% Nikkei 225 shares
35% UK Gilt and fixed interest
Which of the following is TRUE?
A
B
C
D
38
It will not be categorised as a Japanese fund.
It will be automatically categorised as a general fund.
It can be categorised as a fixed interest fund.
It will be categorised as a specialist fund.
The fund manager of a small tracker fund has bought a sample of the shares
that make up the index being tracked. He is therefore using:
A
B
C
D
39
optimisation.
stratification.
screening.
replication.
Ben and Lucy have a daughter Chloe aged 19, and a son Jake aged 16. How
much in total can the family put into ISAs in the 2016/17tax year?
A
B
C
D
£64,000
£49,000
£49,800
£65,040
A
B
C
D
Assuming both have used up their annual exemption, Kate, an additional rate
taxpayer, and her husband Ken, a basic rate taxpayer, have both made
chargeable gains of £5,000 on the sale of Unit Trusts. How much more Capital
Gains Tax, if any, will Kate pay than Ken?
None.
£500.
£1,000.
£1,400.
40
41
A higher rate taxpayer has received the following income from unit trusts:
Dividends £5,000
Interest
£1,200
Assuming they have not received any other dividends or interest payments and
that the income does not take them into the additional rate tax band, how much
Income Tax will they need to pay through their self-assessment tax return?
A
B
C
D
v2015
£1,550.
£1,725
£100.
£1,925.
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A
B
C
D
43
Ali and Steve are both UK resident for tax purposes and both earn £60,000
p.a. Ali has an offshore bond and Steve has an onshore bond. Ignoring the
personal savings allowance, if they both make gains of £20,000 on
encashment, which one of them will pay the most personal tax and by how
much?
Ali will pay 20% more than Steve.
Ali will pay 10% more than Steve.
Steve will pay 20% more than Ali.
Steve will pay 10% more than Ali.
A Real Estate Investment Trust (REIT) has borrowing of £4.2m at 5.2% p.a.
interest. What is the MINIMUM amount they must be receiving in rent to
continue to qualify as a REIT?
A
B
C
D
£218,400.
£240,240.
£262,080.
£273,000.
A
B
C
D
Kerry invested £100,000 in an Enterprise Investment Scheme (EIS) two years
ago when she was a higher rate taxpayer and received maximum tax relief.
She is now a basic rate taxpayer. What will happen if Kerry sells her shares
today?
She will have to pay back half of the £30,000 tax relief she received.
She will receive the proceeds tax free.
The £30,000 tax relief she received will be withdrawn.
Two thirds of the tax relief she received at the time will be withdrawn.
A
B
C
D
Larry is a higher rate taxpayer earning £64,000 and his wife Susan is a basic
rate taxpayer earning £12,000. They both have cashed in offshore bonds
which they have held for 5 years and made gains of £20,000 each. Ignoring
the personal savings allowance, how much is their combined Income Tax
liability?
£16,000.
£12,000.
£8,000.
£4,000.
44
45
46
A hedge fund manager using a long/short strategy is most likely to use which
of the following to protect the portfolio?
A
B
C
D
v2015
Arbitrage.
Options.
Gearing.
Warrants.
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An investor made the following Stakeholder ISA investments 12 months ago:
Type
Investment
Details
Cash ISA
£3,000
3% fixed interest paid annually
Equity ISA
£5,000
8% growth achieved before charges
If no withdrawals have been made and the maximum allowable AMC is
charged today, what is the current total combined value of the ISAs?
A
B
C
D
48
£8,409.
£8,415.
£8,436.
£8,440.
Rosanna and her financial adviser are using positive ethical screening in
constructing her portfolio of equity investments. This will not involve:
A
B
C
D
49
avoiding exposure to companies in undesirable sectors.
compromising ethical beliefs in return for improved growth.
selecting companies with profiles that meets Rosanna’s requirements.
investing in companies that meet industry ethics standards.
As part of risk profiling prior to recommending suitable investments, a financial
adviser is reviewing a client’s financial status including their liabilities and
future requirements for liquid funds. The adviser is therefore ascertaining the
client’s:
A
B
C
D
50
reliance on risk.
tolerance to risk.
acceptance of risk.
capacity for risk.
A financial adviser has completed a fact find and ascertained their client’s
attitude to risk. Why should they not next look at the available tax incentives for
investing, appropriate to the client’s tax status?
A
B
C
D
v2015
because suitable investments should be identified prior to looking at their tax
treatment.
because this will have already have been taken into account during risk
profiling.
to allow the client to seek professional advice from an accountant or other tax
adviser.
to avoid over-committing the client to investments they cannot afford.
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Norris is decumulating his investments following retirement. To preserve the
value of his income in real terms, he will need to:
A
B
C
D
52
take less income than the average income being produced by his assets.
always take his income by reducing capital and re-investing the income
produced.
increase the risk profile of his portfolio to counteract the effects of inflation.
take no more income than his portfolio’s combined income and growth less
inflation.
An adviser recommends that Petra, a cautious growth investor, sells some of
her equity holdings rather than some of her fixed interest securities to pay for a
wedding. This recommendation is most likely to be made if:
A
B
C
D
53
Petra needs the money quickly.
Petra is overweight in equities.
interest rates have fallen sharply.
the market has been volatile recently.
A high risk investor has a time horizon of 15 years for retirement and a short
term horizon of 2 years to buy their daughter a car for £3,000. If they have
£20,000 to invest what would be the most appropriate asset allocation?
A
B
C
D
54
Invest in low risk assets for 2 years and then rebalance.
Invest £20,000 in equities and pay for the car by reducing capital.
Invest the majority in equities and up to £3,000 in low risk assets.
Invest £20,000 in medium risk assets for the whole 15 years.
A financial adviser is completing a fact find with a client. Which of the following
best describes the information he needs to ascertain?
A
B
C
D
55
Assets and liabilities, income and expenditure, priorities and attitude to risk.
Long term goals, short term needs, existing products held, priorities and
attitude to risk.
Needs and objectives, income and expenditure, priorities and attitude to risk.
Needs and objectives, assets and liabilities, income and expenditure, priorities
and attitude to risk.
When Tanya established her portfolio two years ago it was benchmarked
against the FTSE All Share index. This suggests that the portfolio:
A
B
C
D
v2015
contains shares in FTSE100 and smaller UK companies.
is consistent with her medium risk attitude to investment.
is made up of a mixture of shares and fixed interest securities.
is intended to produce short term gains with limited risk.
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56
If an adviser cannot benchmark a client’s portfolio to a recognised index due to
the mix of assets it contains it would be best for them to:
A
B
C
D
57
benchmark against the index that has the closest asset match to the portfolio.
identify the weighting of asset types in the portfolio and benchmark against
more than one index.
benchmark against clients of theirs who have similarly constructed portfolios.
establish a benchmark using the portfolio’s overall performance after one year.
A financial adviser has the following clients:
• Meryl, aged 63, recently retired and living off investment income
• Tom, aged 32, a high earner with surplus monthly income
• Chris, aged 22 who wants to buy a house in two years time
• Suki, aged 46, who is risk averse and has only deposit based savings
Which client’s investment objective is most likely to be capital appreciation?
A
B
C
D
58
Meryl.
Tom.
Chris.
Suki.
Rebalancing of a portfolio is mainly designed to:
A
B
C
D
59
minimise exposure to unnecessary Income Tax and CGT liabilities.
amend the asset mix on an ongoing basis to match the benchmark index.
reduce overall exposure to market risk and specific risk over time.
ensure the asset mix remains in line with client needs and risk tolerance.
A financial adviser is researching the following funds:
Fund
Fund Size (£m)
Investment Area/Type
W
162
UK equities
X
154
Gilt & Fixed Interest
Y
200
Tracker
Z
40
US smaller companies
Which fund is likely to have the highest Total Expense Ratio (TER)?
A
B
C
D
60
Fund W.
Fund X.
Fund Y.
Fund Z.
Which of the following investors will be paying the highest ongoing
management charges on their portfolio?
A
B
C
D
v2015
Dorinda, who has £50,000 invested in a range of corporate bond OEICs.
Gary, who has £75,000 invested in an investment trust.
Emma, who has £60,000 invested in specialist unit trusts.
Bruce, who has £55,000 invested in tracker funds.
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A
B
C
D
62
Luke is a basic rate tax payer and James is a higher rate tax payer. They have
both received dividend income of £6,000 from their collective investments.
Which of the following statement is incorrect assuming they have received no
other dividend income?
.Luke and James will both have a dividend allowance of £5,000.
Luke will have a tax liability of 7.5% on £1,000 of dividend income.
James will have a tax liability of 22.5% on £1,000 of dividend income.
James will have a tax liability of £325.
A fund has a positive information ratio. This confirms that:
A
B
C
D
the fund manager has outperformed the relevant index.
income produced is in excess of the average fixed interest yield.
a return higher than the rate of inflation is being achieved.
the fund is in the top quartile of its market sector.
A
B
C
D
When considering portfolio construction with particular reference to risk, which
method is described as “using a portfolio modelling tool”?
replication.
stochastic
historic.
adjusted historic
63
64
Structured products that contain hard protection:
A
B
C
D
65
are not exposed to counterparty risk.
may not return invested capital in full.
do not charge early encashment fees.
may not produce a positive return.
Which of the following statements regarding fund costs and charges is True?
A
B
C
D
66
Performance fees are charged by most UK equity funds.
Annual Management Charges are highest on passive funds.
The Total Expense Ratio of a fund is never less than the AMC.
Stamp Duty is not included when calculating a Total Expense Ratio.
Olly and Will both have investments in funds with a current value of £20,000
each. Olly has to pay 1.5% AMC and Will only has to pay 0.75%. This means
that:
A
B
C
D
v2015
Will’s fund will outperform Olly’s over an identical investment period.
Olly’s fund will charge a performance fee to offset the low AMC.
the management of Will’s fund is unlikely to be as active as Olly’s.
Olly’s fund is likely to be more diversified than Will’s.
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For Questions 67-100 more than 1 option is correct. You must select all the correct
options to gain the mark.
67
When comparing government stock with corporate bonds:
A
B
C
D
E
68
both will trade for more than the par value if the coupon is higher than
prevailing market interest rates.
both are purchased ex dividend if the transaction takes place within 7 days of
the interest payment date.
only the government stock can be traded without reference to the issuer.
both pay interest gross twice yearly.
only the corporate bonds use an investment bank to promote new issues.
A fund manager is investing in Treasury Bills. He should be aware that:
A
B
C
D
E
F
69
the maximum term available is six months.
they are not considered to be risk free.
interest is paid gross but is taxable.
they do not pay interest but are purchased for below the redemption price.
they are only issued by the Treasury once per month.
they cannot be traded during the term.
When considering the characteristics of index linked gilts:
A
B
C
D
E
70
RPI is taken into account in interest payment annually.
interest is paid net but tax can be reclaimed by non-taxpayers.
both capital and income rise in line with RPI if held to redemption.
the interest payment made is based on the value of RPI 6 months previously.
they are not subject to Capital Gains Tax on early sale or maturity.
A financial institution is considering investing in debentures, convertible loan
stock, and floating rate notes issued by a UK bank. In assessing the merits of
each of these potential investments they will need to take into account that:
A
B
C
D
E
v2015
any floating charge linked to the debentures will be affected by property prices.
Capital Gains Tax may be payable on the convertible loan stock.
the market value of the floating rate notes is likely to be volatile.
they will receive voting rights from the convertible loan stock from the date of
conversion.
the security offered by the debentures is managed by appointed trustees.
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Charles is looking to improve the diversification of his investments by buying a
buy-to-let property. If he proceeds:
A
B
C
D
E
F
72
he should find a tenant willing to commit to a lease of at least three years.
his net yield will be the rent received as a percentage of the property value.
he will be exposing himself to liquidity risk.
he can find a suitable agent to manage the investment by contacting ARLA.
as a first time investor SDLT is only payable if the purchase price is over
£220,000.
he will need to consider the impact of potential void periods.
Joel, an experienced investor, is buying copper futures as he believes the price
will rise. He should be aware that:
A
B
C
D
73
prices are likely to fall if demand in developing countries falls.
as a soft commodity, copper will be more volatile than hard commodities.
the returns will be correlated to global equities.
he can trade the future on the open market at any time.
Rosy and Tim have a son Oscar aged 18, and a daughter Sierra aged 16.
None of the family have made any ISA investments in the past. Excluding
JISA, in the current tax year therefore:
A
B
C
D
74
they can invest a maximum of £60,960 in cash ISAs.
Rosy and Tim can open a joint cash ISA with £30,000
Rosy, Tim and Oscar are eligible for a stocks & shares ISA but Sierra isn’t.
they can invest a maximum of £23,040 in cash ISAs.
Carrie is buying £12,000 of shares from a stockbroker using a stock transfer
form and Julian is buying £5,000 of shares on-line using CREST. Therefore:
A
B
C
D
E
75
Julian’s Stamp Duty will be rounded up to the nearest £5.
Carrie will pay a PTM levy but Julian will not.
Julian will pay 0.5% of the purchase price in Stamp Duty Reserve Tax.
Carrie will pay a lower rate of Stamp Duty than Julian.
both will pay commission to complete their purchases.
Iris has cumulative preference shares and Kenneth has participating
preference shares. When comparing the two types of equity:
A
B
C
D
v2015
Iris will receive a payment in addition to the fixed interest, based on the
company’s profits.
Kenneth’s shares pay a variable rate of interest.
If Iris does not receive her payment one year, it is carried over to future years.
Kenneth is likely to receive a higher return than Iris in the same year if the
company performs well.
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76
Maurice is comparing several companies using published investment ratios,
with a view to picking which ones to invest in for long term growth. In reviewing
the ratios Maurice:
A
B
C
D
E
77
should avoid companies with rising dividend cover.
can assess the demand for a company’s shares using the P/E ratio.
should consider any external factors that may be affecting the companies.
can use earnings per share to identify the trend in each company’s profitability.
should remember that they are only estimates of future performance.
When comparing the FT30 with the FTSE100:
A
B
C
D
78
the FT30 equally weights all companies but the FTSE100 does not.
the FTSE100 is based on companies’ market capitalisation.
the FT30 contains only companies outside of the FTSE100.
the FTSE100 is geometrically weighted.
Dan, a high net worth investor, is considering diversifying by investing in
commercial property. If he proceeds:
A
B
C
D
E
79
he may benefit from increasing rent due to reviews specified in the lease.
it will usually be easy to split the property into smaller units and sell part of it.
he should look for properties with tenants on short-term leases.
he is likely to receive a higher rental yield than on residential property.
the property may be difficult to sell if he wants access to his capital.
An investor is looking at a number of commodities. Which of the following
would be described as soft commodities?
A
B
C
D
E
F
80
Livestock.
Crude oil.
Natural gas.
Coffee.
Wheat.
Tin.
When placing £20,000 in a savings account with a UK bank, the depositor
needs to be aware that:
A
B
C
D
E
v2015
they are protected by the FSCS if the bank becomes insolvent.
if they are a higher rate taxpayer they will have to pay additional tax on any
interest they receive.
to achieve a positive real return the account will need to pay net interest in
excess of inflation.
they are exposing their funds to investment risk.
interest on notice accounts will be paid gross but is taxable.
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81
Jerome is investing in an authorised UCITS unit trust designated as an index
tracker fund. This means that:
A
B
C
D
E
82
the fund must hold at least 5% in cash.
Normally no more than 20% of the fund can be invested in a single company.
the fund must have a minimum of 15 holdings.
A tracker fund valued at £10,000,000 could invest in one company to the value
of £3,500,000 in exceptional market conditions.
the maximum number of holdings within a fund is 100
The regulatory framework and structure of an Open-Ended Investment
Company (OEIC) includes that:
A
B
C
D
E
83
it must issue units to investors based on a single price.
the Depository reports to investors twice yearly.
a dilution levy can be charged for large inflows to outflows from the fund.
the Authorised Corporate Director is responsible for compliance with
regulation.
they are taxed in the same way as unit trusts.
Barbara works for the new product department of a building society and is
considering launching a structured product. She is likely to include:
A
B
C
D
84
a zero coupon bond to provide a capital guarantee.
growth linked to the performance of a recognised equity index.
a put option to provide the link to the growth in the equity index used.
a no risk strategy for investors with limited funds to invest.
Elwyn has invested £60,000 of his savings in a new Enterprise Investment
Scheme (EIS). As a result:
A
B
C
D
E
85
he will receive up to £18,000 tax relief on his investment.
he will only receive tax relief if he keeps the shares for at least 2 years.
any tax relief he receives will be withdrawn if he does not keep the shares for 3
years.
If he makes a loss on the future disposal of the EIS shares he can carry this
forward.
he is investing in listed ordinary shares.
When comparing a property unit trust with an insurance company property
fund, investors should be aware that:
A
B
C
D
E
v2015
only the unit trust can suspend dealing in the fund for up to 6 months.
neither can result in a personal Capital Gains Tax liability for the investor.
the insurance company fund must distribute 90% of ring fenced profits.
the unit trust is more tax efficient for a non-taxpayer.
neither can borrow to gear the fund.
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86
Bill is investing in a Stakeholder cash ISA and Jenny is investing in a nonstakeholder cash ISA. As a result:
A
B
C
D
E
87
both must be able to pay in £10 as a minimum investment on account opening.
the interest rate on Bill’s ISA will be higher than on Jenny’s.
only Bill’s ISA has a minimum interest rate that it must pay.
Jenny can invest more in any one tax year than Bill.
both must be able to deposit new funds by cheque.
Which of the following statements are correct in respect of cash or stocks and
shares held within an ISA?
A
B
C
D
E
88
Interest distributions made from an ISA carry a 20% or 25% tax credit so that
Higher and Additional Rate taxpayers can reclaim a tax refund
Property income distributions from REITS are paid gross to ISA managers
Losses accrued on the sale of a Stocks and Shares ISA can be used to offset
gains on the sale of other assets
All interest held in a cash ISA is paid gross
Dividend distributions from ISA investments are exempt from any additional tax
liability
Zara has invested £500,000 in an OEIC but is disappointed in the returns she
has received. As an adventurous investor she has decided to cash in her
holding and invest in a small number of direct equities. In doing so she will:
A
B
C
D
E
89
be increasing her exposure to specific risk.
be more likely to pay personal Capital Gains Tax in future.
have more control over her investments.
avoid paying future annual management charges.
be increasing her diversity.
When comparing a variable price unitised with profit fund with a conventional
with profit fund:
A
B
C
D
E
90
only the conventional fund may charge a Market Value Reduction.
bonuses on the unitised fund have the effect of increasing the unit price.
both are designed to produce smoothed returns.
new units are added annually to the unitised fund to reflect bonuses declared.
the conventional fund unit price will change twice per year to reflect bonuses.
Margaret has an investment that she has held for some time. She refers to this
being invested in a Cautious Managed investment fund. This means that:
A
B
C
D
v2015
a maximum of 60% of her money will be invested in equities.
she can benefit from pound cost averaging by investing monthly.
she may receive regular bonuses dependent on fund performance.
her fund will have a single price so will be easy for her to value.
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91
A financial adviser has recommended that a client switches a number of his
investments. In what circumstances may this be appropriate?
A
B
C
D
92
The client has a need for income that did not previously exist.
There is an opportunity to benefit from churning.
The adviser does not benefit from trail commission on current holdings.
Existing holdings have underperformed in their sectors.
When calculating the Money Weighted Rate of Return (MWR) and the Time
Weighted Rate of Return(TWR):
A
B
C
D
E
93
MWR aims to eliminate the distortion of the timing of new money invested.
MWR is sometimes also known as the internal rate of return.
TWR enables comparison between fund managers.
MWR is the most accurate way of comparing different portfolios.
TWR breaks down the period being assessed into sub periods.
Performance attribution evaluates how an investment manager has performed
in which of the following areas?
A
B
C
D
94
Asset Allocation.
Stock Selection.
Market Timing.
Expenses ratio.
Capital Gains Tax due on a switch from one investment into another:
A
B
C
D
95
cannot be offset against other realised losses.
can sometimes be avoided by transferring assets into a spouse’s name.
may be worth paying if the switch helps to control risk or improve performance.
may be avoided by using rollover relief.
As private clients near retirement, there is often a need to review their
portfolios to:
A
B
C
D
v2015
accelerate the rate of growth in the final few years.
realise gains to pay the tax before their income reduces.
reduce their exposure to equities to limit risk.
focus more on income than growth.
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96
Trevor is reviewing a client’s portfolio that started the year with a value of
£60,000. A further £5,000 was invested after six months and at the end of the
year it was worth £72,000. He is in the process of calculating the return
achieved. Therefore:
A
B
C
D
97
the money weighted rate of return is 11.2%
the time weighted rate of return is 10.77%.
Trevor is undertaking performance evaluation.
the performance of the portfolio is being measured.
In assessing how well a fund manager has performed it is important to look at
factors including:
A
B
C
D
E
the performance of deposit based assets over the same period.
how effective they have been at stock picking.
their skill in deciding when to introduce or withdraw funds from the market.
the manager’s retention of staff and customer service.
their success in adjusting asset allocation over the period.
A
B
C
D
A portfolio was established to match a benchmark asset allocation and has
performed as follows:
Asset
Weighting
Performance
UK equities
40%
15%
Overseas equities
30%
10%
Fixed interest
20%
8%
Cash
10%
5%
This means that:
the return on UK equities in the portfolio as a whole is 6%.
the return on overseas equities in the portfolio as a whole is 3%.
the return on fixed interest in the portfolio as a whole is 2%
the return on cash in the portfolio as a whole is 5%
98
99
In selecting a fund manager most practitioners would look at:
A
B
C
D
E
100
commission rates payable.
past performance.
the structure and style of investment.
qualifications.
initial and ongoing charges.
An investor with a balanced risk classification would normally have
investments in their portfolio including:
A
B
C
D
E
v2015
gilts.
larger overseas listed companies.
derivatives.
unlisted securities.
cash.
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