Asset Classes Flashcards

What is 'leverage' in investment management and what is its key risk?

Answer: Borrowing money to increase the size of an investment position, amplifying both gains and losses; the key risk is magnified losses

Leverage involves using borrowed money or derivatives to increase exposure beyond the capital invested. It amplifies returns when markets move favourably but equally amplifies losses when they move adversely, potentially exceeding the original investment.

What is a 'structured product' in investment terms?

Answer: A pre-packaged investment strategy combining a debt instrument with derivatives to create a customised risk/return profile

Structured products are pre-packaged investments that typically combine a bond element (capital protection) with a derivative element (performance linked to an underlying asset). They offer tailored risk/return profiles but can be complex and illiquid.

What is 'liquidity risk' in asset management?

Answer: The risk that an asset cannot be sold quickly enough at a fair price without significant loss

Liquidity risk is the danger that an investment cannot be sold quickly at or near its fair value. Illiquid assets (property, private equity, some bonds) may need to be sold at a discount in times of stress, particularly when many investors want to sell simultaneously.

What is the difference between 'income' and 'accumulation' fund units?

Answer: Income units pay out investment returns as regular distributions; accumulation units reinvest returns back into the fund

Income (distribution) units/shares pay out dividends, interest, and other income to investors as cash distributions. Accumulation units/shares automatically reinvest any income back into the fund, increasing the unit price rather than making cash payments.

What is 'rebalancing' a portfolio?

Answer: Buying and selling assets to restore a portfolio to its target asset allocation after market movements have caused drift

Rebalancing involves periodically buying and selling assets to restore a portfolio back to its target weights. Market movements cause allocations to drift; rebalancing maintains the desired risk profile and enforces a disciplined buy-low, sell-high approach.

What is a 'money market fund'?

Answer: A collective investment scheme investing in short-term, high-quality debt instruments, providing liquidity and capital preservation

Money market funds invest in short-term, high-quality instruments such as treasury bills, commercial paper, and certificates of deposit. They aim to maintain a stable value and provide liquidity, acting as a cash management tool for investors.