Smart beta and Emerging Markets positives and negatives?
+ Usually EM’s are less efficient and so can offer mis priced securities to take advantage of.
- Hihgly concentrated indicies with 25 companies taking up top 25% on FTSE EM index compared to 15% on the FTSE world.
- Less sector diversification and so needs active management to maintain diversification.
- Many countries dollarized so turbulence can effect many markets in ME’s
- remember explain what smart beta is ie no market cap weights but use a subset fundamentals.
- EM can be expensive. Alternative indexation can offer value for money.
- liquidity can be a concern for smart beta funds and they often base them on historic correlations.
What formula shows the most efficient type of portfolio?
Sharpe - Rp-Rf / SD
If a portfolio increased 97.5% over 12 years what is the formula?
Expand brackets 100(1+r)^12=197.5
12th root of 1.975 minus 1
What is R^2?
value of the square of the correlation coefficient. often referred to as coefficient of determination and how well stocks are correlated.
what is the appraisal ratio?
Appraising managers against the benchmark or a passive fund. portfolio alpha / portfolio unsystematic risk
This can be compared to the Sharpe ratio (return divided by total risk). If the appraisal ratio exceeds the Sharpe ratio then this is indicative of superior performance in that the extra return has more than compensated for the additional risk.
what is the information ratio?
Takes the average alpha divided by standard deviation of alpha. This allows investors to assess the consistency of fund managers.
IR = (fund rtn Rp - target return Rt) / tracking error
What is the time weighted rate of return?
(Ve1/Vs1) x (Ve2/Vs2) -1
What is the shareholders rights directive?
Empowering private client and wealth management sectors encouraging everyone to join together to get their voice heard. Highlights remuneration and related party transactions and ensures transmission of info to shareholders.
What is value Investing?
Inexpensive undervalue firms with efficient processes.
Generally less risk and low beta.
High Price to book ratios.
Long term strategy
What is growth investing?
Rapid growth prospect stocks often early stage copanies.
Small/Mid caps higher proportion.
Lower Price to Book ratio.
long term strategy
What is momentum investing?
Stocks with high returns for last 3-12 months.
Looking to exploit behavioral shortcomings as well as over/undereacting.
Short term strategy.
What is corporate governance?
Uses the UK corporate governance code 2012 was set to create a set of principles for ‘companies’ not investors.
-board leadership and effectiveness
- remuneration
- accountability
-shareholder relations
Ethical behaviour - paying staff fairly
Transparency - all figure should be true without ‘creative accounting or exaggeration.
What are the positives and negatives of Emerging Markets?
- usually less efficient on so more likely to spot mis-priced securities
- EM indicies such as FTSE EM top 25 companies are 25% of index compared with 14% on the FTSE world.
- less sector diversification
- Countires across EM are highly correlated due to being dollarized so terbulant times can effect all markets.
What is the unlevered beta ratio?
BU = BL / (1 + debt to equity)
What is the money weighted rate of return?
T0 - 97.5m T-6 5m T-12 104.5m
97.5 (1+ r) + 5 (1 + r)^0.5
usually a multiple choice answer so trial and error.
How are OEIC taxed?
Dividend income is exempt and so is CGT (however they come with 10% tax credit for BRT payers).
The fund itself pays 20% corporation tax.
What is the REIT tax position?
Underviersified high risk.Must distribute 90% of profits to be corporation tax exempt. 75% of total profits from property letting.
What is the VCT tax position?
Diversified higher risk quoted company invests in a selection of companies which are unquoted.
Dividends are paid at BRT 10%
exempt from capital gains instantly but no loss relief.
30% on max investment of £1m if held for 5 years.
What is the EIS tax position?
An undiversified direct investment.
30% relief on up to £1m investment if held for 3 years.
100% relief on gains and and loss relief
Dividends taxed at income rate
EIS’S QUALIFY for business property relief if held for 2 years so no inheritance tax would be payable.
How are offshore funds taxed?
Funds offshore do not pay tax to the UK. Holdings within the fund are subject to local tax rules and so low tax jurisdictions make good locations to set up.
If individuals withdraw from the funds they are taxable at their local income tax rate dependant on if reporting on non reporting.
How is a non reporting fund taxed?
No tax ont he fund unless cash is remitted back to the uk.
Gains remitted back to the UK are taxed as INCOME not CGT!
How are UK residents taxed?
Write down ‘Statutory residence test!!!’
If overseas then automatically not a resident
183 days in the UK a year you ARE resident.
Domicile has impact on overseas income.
What is the GRY and YTM calcuation
7% coupon 8 year baught at £95
7 / 95 x 100 = 7.4%
(£5/8)/ £95 = 0.07%
0.07 + 7.4 = 8.1%
Share Price (Ex Div) forumla?
SP Ex div = D1 / r - g
Where r is the expected return NOT the required return.
and D1 is the dividend payment.
