CISI Investment Advice Diploma cheat sheet

Primary market: issuer raises new capital via IPOs, rights issues or bond issuance; secondary market: investors trade existing securities, providing liquidity and price discovery.

Money market instruments mature in one year or less (T-bills, commercial paper, certificates of deposit, repos); capital market instruments exceed one year (bonds, equities).

Equity holders rank last in the creditor hierarchy but hold residual claim on profits and voting rights; preference shareholders rank ahead of ordinary shareholders for dividends.

Bond price and yield are inversely related: price = sum of coupon/(1+y)^t plus redemption/(1+y)^n; a rise in required yield lowers price.

Repo: sale of securities with agreement to repurchase at a set price and date; the implied rate is the repo rate, secured by collateral with a haircut.

Derivatives (futures, options, swaps) derive value from an underlying; futures obligate both parties, options give the buyer a right for a premium.

Exchange-traded venues offer central clearing and standardised contracts; OTC markets offer bespoke terms but carry counterparty credit risk.

Indices aggregate constituent prices by weighting method: market-cap weighting favours large firms; price weighting and equal weighting behave differently in concentration.

Total return = (ending value − beginning value + income) / beginning value; annualise multi-period returns geometrically, not arithmetically.

Arithmetic mean overstates compounded wealth; geometric mean (CAGR) reflects actual growth and is always lower when returns vary.

Nominal return ≈ real return + inflation; real return = (1 + nominal)/(1 + inflation) − 1.

Risk measures: standard deviation (total volatility), beta (systematic sensitivity), duration (bond price sensitivity to yield), tracking error (deviation from benchmark).

Sharpe ratio = (portfolio return − risk-free rate) / standard deviation; higher values indicate better risk-adjusted return.

Diversification reduces unsystematic (company-specific) risk; systematic (market) risk remains and is priced by beta.

Correlation ranges from −1 to +1; combining assets with correlation below +1 reduces portfolio volatility below the weighted average of components.

Risk tolerance combines willingness (attitude, psychology) and ability (capacity, time horizon, wealth, liabilities) to bear loss.

Dividend discount model: value = D1/(r − g), where g is sustainable growth = retention ratio × return on equity.

Gordon growth requires r > g; as g approaches r, valuation becomes unstable, so use multi-stage models for high-growth firms.

P/E = price per share / earnings per share; a high P/E implies expected growth or lower perceived risk, not automatically overvaluation.

Free cash flow to firm discounted at WACC; free cash flow to equity discounted at cost of equity - matching cash flow to discount rate is essential.

WACC = (E/V × cost of equity) + (D/V × cost of debt × (1 − tax rate)); cost of equity often estimated via CAPM: rf + beta × equity risk premium.

Duration approximates percentage price change for a small yield change; modified duration = Macaulay duration / (1 + y/m); convexity improves the estimate for larger moves.

Credit analysis assesses default probability, recovery, and spread; rating downgrades widen spreads and lower price.

Technical analysis uses price and volume patterns; fundamental analysis uses earnings, cash flow, and balance-sheet data to estimate intrinsic value.

Strategic asset allocation sets long-term policy weights from objectives, risk tolerance and constraints; tactical allocation makes short-term deviations from policy.

Efficient frontier plots portfolios giving maximum expected return for each level of risk; the optimal portfolio depends on the investor's utility function.

Capital allocation line combines the risk-free asset with the tangency (market) portfolio; the Sharpe ratio of the tangency portfolio is the maximum attainable.

Rebalancing restores target weights; calendar (time-based) and threshold (band-based) methods differ in trading frequency and cost.

Constraints commonly summarised as liquidity, time horizon, tax, legal/regulatory, and unique circumstances.

Home bias concentrates portfolios domestically, reducing diversification and increasing exposure to local political and currency risk.

Correlation regimes shift in crises; diversification benefits can fall precisely when drawdowns are largest.

Active management seeks alpha through security selection and timing; passive replication minimises tracking error and cost.

Suitability requires matching recommendations to the client's objectives, risk tolerance, financial situation, knowledge and experience.

Fact-find captures personal details, dependants, income, assets, liabilities, existing arrangements, attitude to risk and capacity for loss.

Risk profiling tools produce a score; the adviser must confirm the result is consistent with the client's circumstances and capacity for loss.

Know-your-customer and anti-money-laundering checks require identity verification, source of funds and source of wealth evidence.

A financial plan sequences goals over the life cycle: protection, emergency reserve, debt reduction, retirement funding, then discretionary investing.

Vulnerability indicators (bereavement, cognitive decline, coercion, low literacy) require adapted communication and documented rationale.

Record-keeping must demonstrate why a recommendation was suitable, including alternatives considered and costs disclosed.

Reviews should be scheduled and triggered by life events (retirement, inheritance, divorce, job change) and market or product changes.

Treating customers fairly and acting in the client's best interests are core conduct standards; conflicts of interest must be identified, disclosed and managed.

Client money must be segregated and reconciled; firms must maintain adequate capital and record-keeping under prudential rules.

Inducements: fees or commissions that conflict with duties to the client are restricted; disclosure and quality-enhancement tests apply.

Market abuse covers insider dealing, unlawful disclosure, and market manipulation; suspicious transactions must be reported to the relevant authority.

Best execution requires taking all sufficient steps to obtain the best possible result considering price, cost, speed, likelihood of execution and settlement.

Complaints must be handled within defined time limits, with escalation to an independent ombudsman where applicable.

Personal account dealing and outside business interests require prior approval and disclosure to avoid conflicts.

Professional standards require competence, confidentiality, integrity and appropriate complaints and disciplinary procedures.

Tax wrappers change the tax treatment of returns: pension schemes typically offer relief on contributions and tax-deferred growth, with taxable withdrawals.

Individual savings accounts generally exempt interest, dividends and capital gains from tax, subject to annual contribution limits.

Capital gains tax applies to realised gains above the annual exempt amount; losses can offset gains in the same or future years, not income.

Dividend taxation depends on the investor's marginal band; tax credits and allowances vary by jurisdiction and change with legislation.

Tax-efficient sequencing: use allowances first, hold income-producing assets in tax-exempt wrappers, and defer gains where reliefs apply.

Inheritance tax may apply to estates above the nil-rate band; reliefs include spouse exemption, business relief and charitable legacies.

Tax-loss harvesting realises losses to offset gains, but anti-avoidance rules (such as bed-and-breakfasting restrictions) limit repurchase timing.

Tax rules, rates and allowances are jurisdiction-specific and subject to change; advisers must verify current legislation and seek specialist tax advice.

Collective investment schemes pool investor money under professional management; open-ended funds issue and redeem units at NAV, closed-ended funds trade at market price.

Exchange-traded funds trade intraday on exchanges; they may replicate physically or synthetically via swaps, introducing counterparty risk.

Investment trusts are closed-ended companies; gearing and premium/discount to NAV are distinguishing features versus open-ended funds.

Bonds differ by issuer (government, corporate), credit quality, duration and structure (fixed, floating, index-linked, callable).

Structured products combine derivatives with deposits or notes; capital protection is only as strong as the issuer's creditworthiness.

Life and pension products include annuities, drawdown and defined contribution schemes; charges and guarantees vary materially.

Alternative investments (property, private equity, hedge funds, commodities) may offer diversification but typically carry illiquidity and valuation risk.

Discretionary management gives the manager authority to trade; advisory services require client consent for each recommendation; execution-only services do not assess suitability.