Investment Environment & UK Markets Flashcards
6 cards from real IMC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Investment Environment & UK Markets flashcards as text
What is the difference between 'primary' and 'secondary' markets?
Answer: Primary markets are where new securities are issued; secondary markets are where existing securities are traded
In primary markets, companies raise capital by issuing new securities directly to investors (e.g., IPOs). Secondary markets are where previously issued securities are traded between investors, providing liquidity without the company receiving proceeds.
What is an IPO?
Answer: An Initial Public Offering — the first sale of a company's shares to the public
An IPO (Initial Public Offering) is when a privately held company sells shares to the public for the first time, listing on a stock exchange. It allows the company to raise capital from public investors.
What does 'diversification' achieve in a portfolio context?
Answer: It reduces unsystematic (specific) risk by spreading investments across different assets
Diversification reduces unsystematic (idiosyncratic) risk — the risk specific to individual investments — by spreading holdings across different assets, sectors, and geographies. Systematic risk (market risk) cannot be diversified away.
In UK regulation, what is the purpose of 'know your customer' (KYC) requirements?
Answer: To verify client identity, understand their circumstances, and ensure suitable advice and services
KYC requirements oblige firms to identify and verify clients, understand their financial situation, investment knowledge, objectives, and risk tolerance. This enables firms to provide suitable advice and helps prevent financial crime.
What is 'alpha' in investment management?
Answer: The excess return of a portfolio relative to its benchmark, attributed to active management skill
Alpha measures the excess return generated by a portfolio manager above what would be expected given the portfolio's risk level (beta) and the benchmark return. Positive alpha indicates outperformance attributable to manager skill.
What is 'beta' in the context of portfolio management?
Answer: A measure of a portfolio's or security's sensitivity to market movements
Beta measures the sensitivity of a security or portfolio to market movements. A beta of 1 means it moves in line with the market; greater than 1 means it is more volatile than the market; less than 1 means less volatile.