Wealth Management BF2206

AY 2013 – 2014

Finals MCQ

MCQ:

1 D 11 D
2 D 12 B
3 B 13 B
4 C 14 A
5 B 15 D
6 C/ D – Uh what? 16 B
7 B 17 C
8 A 18 C – Uh dunno
9 A 19 A
10 C 20 D

Question 1 (Same as previous year)

Question 2

a) Fund A is superior.

b) 3 statistics to look out for in deciding the best fund

1. Returns against benchmark: Fund A consistently outperforms benchmark, Fund B underperformed

for several years.

2. Sharpe Ratio / Sortino Ratio: Fund A has a more positive Sharpe and Sortino Ratio than Fund B. For
each unit of market risk taken, Fund A is able to produce more returns than Fund B.

3. Information Error: Fund A has a larger Information Error, suggesting that the Fund manager is able
to better produce returns than outperform benchmark, per unit of idiosyncratic risk, as compared to
Fund Manager B.

c) Pros and cons for Mutual Funds/ Unit Trusts

Advantages
1. Professional Management by Fund managers
2. Lower capital outlay in order to gain access to
many funds – Divisibility
3. Diversification benefits
Disadvantages
1. Professional management fees makes it
harder for the fund to outperform the
benchmark
3. Exposure to additional counterparty risk of
the parent company
Cash drag
A portion is used for liquidity purposes and
limits the returns available
Difficult to evaluate funds given the lack of info
Over-diversification
Question 3 (Same as previous year)

Question 4 (Same as previous year)

Question 5 (Same as previous year)

Question 6 (Structured Products)

A) 3 components of structured products

Component 1. Structured products are made up of a basic financial product

Component 2. Pricing is not transparent

Component 3. Highly customized, difficult to find party to trade with, non-liquid.

B) 3 Risks to consider before investing in structured products

Factor 1: Liquidity Risks. Structured products are usually customized and sold Over-The-Counter.
Difficult to find another buyer that is looking for the exact same type of instrument.

Factor 2: Issuer’s Credit Risk. Structured products are typically not secured by assets, hence subject to
higher risks of default.

Factor 3: Currency Risk. Structured products may be denominated in foreign currencies, subjecting
the buyer to a currency risk. Currency in which the structured product is denominated in may
depreciate against home currency and returns will be lower than expected.

Factor 4: Capital risk of underlying asset. Market conditions may influence the performance of
underlying security and result in losses for the buyer.

 Time frame; Coupon payment, Market outlook/ asset performance

C) What is a Zero + Option Structured Product? What are the uses, and who is it suitable for?

Zero Coupon Bond + Buy a call option.

Uses: The Zero coupon bond is sold at a discount, and the additional premium paid by the investor is
used to purchase a Call Option of a security. At maturity, the bond can be redeemed for the principal
sum the investor had invested, while the call option will provide the upside to the Structured Product.
In the event the call option is out of the money on the expiry date, then the investor will not receive
any additional upside. However, if it is in the money, the call option will be exercised and the gains
will be added to the investor’s returns.

This product is suitable for investor that have low tolerance for loss and want to have their principal
sum protected. On the other hand, they are willing to accept a possibility of not having any upside to
their investment. They feel that they would only have lost out in terms of opportunity cost of
investing, and prefer this to taking on more risk. Suitable to people with low risk tolerance.
Question 7

Stages Foundation Accumulation Maintenance Distribution

Objectives  Protect  Grow wealth  Maintain  Maintain
earning and maximise wealth and retirement
power returns plan for lifestyle and
 Willing to  Willing and retirement plan for
take risk, but able to take  Able but less succession
lack ability risks willing to  Able to take
take risks risks
 Might be very
willing to
take risks,
because little
liabilities left.
 Might be
unwilling to
take risks,
because no
point growing
wealth
anymore
Suitable Portfolio Higher amount of Higher amount of Higher amount of Higher amount of
Composition publicly equities and bonds and money bonds and
accessible structured market securities dividend-yielding
equities products securities