CISI Investment Advice Diploma flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Primary market

Market where issuers raise new capital by selling newly created securities to investors, for example through an initial public offering or a bond issue.

Repo rate

Interest rate implied by a sale and repurchase agreement, where securities are sold with a commitment to buy them back at a set price and future date.

Bond price-yield relationship

Bond prices move inversely to yields; when the required yield rises, the present value of future coupons and redemption falls, lowering the price.

Futures versus options

A futures contract obliges both parties to transact at a set price and date; an option gives the buyer a right, not an obligation, for a premium.

Geometric mean return

Compound annual growth rate calculated by multiplying (1 + each period return), taking the nth root and subtracting one; it reflects actual wealth growth.

Sharpe ratio

Risk-adjusted performance measure equal to portfolio return minus the risk-free rate, divided by the portfolio's standard deviation of returns.

Systematic risk

Market-wide risk that cannot be removed by diversification, such as interest rate or recession risk, and is measured by beta.

Correlation coefficient

Statistic between minus one and plus one measuring how two assets move together; values below plus one allow diversification to reduce portfolio volatility.

Gordon growth model

Valuation formula where value equals next year's dividend divided by the required return minus growth; it requires the required return to exceed growth.

Weighted average cost of capital

Blended cost of equity and after-tax cost of debt weighted by capital structure; used to discount free cash flow to the firm in valuation.

Modified duration

Measure of bond price sensitivity to a small change in yield, calculated as Macaulay duration divided by one plus yield divided by coupon frequency.

Price-to-earnings ratio

Share price divided by earnings per share; a high multiple may reflect expected growth or lower perceived risk rather than automatic overvaluation.

Efficient frontier

Set of portfolios offering the highest expected return for each level of risk; portfolios below it are inefficient for a given risk level.

Strategic asset allocation

Long-term policy mix of asset classes set from the investor's objectives, risk tolerance and constraints, and reviewed periodically rather than traded frequently.

Rebalancing bands

Threshold-based rule that triggers trades when an asset's weight deviates from target by a set percentage, controlling risk drift and trading costs.

Home bias

Tendency to overweight domestic assets, which reduces international diversification and concentrates exposure to local currency and political risk.

Suitability assessment

Process of matching a recommendation to the client's objectives, risk tolerance, financial situation, knowledge and experience, with documented rationale.

Capacity for loss

Client's financial ability to absorb losses without undermining essential goals, distinct from their psychological willingness to accept risk.

Vulnerable customer

Client whose circumstances, such as bereavement, illness, low literacy or coercion, increase harm risk and require adapted communication and documented care.

Know your customer

Identity verification and due diligence process collecting personal details, source of funds and source of wealth to prevent money laundering.

Best execution

Obligation to take all sufficient steps to obtain the best possible result for clients, considering price, cost, speed, execution likelihood and settlement.

Market abuse

Insider dealing, unlawful disclosure of inside information and market manipulation; suspicious transactions must be reported to the relevant authority.

Inducements

Fees or benefits paid to or by firms that may conflict with duties to clients; they are restricted and must meet disclosure and quality-enhancement tests.

Client money segregation

Requirement to hold client funds separately from firm assets, with regular reconciliation, so client money is protected on firm insolvency.

Annual exempt amount

Threshold of capital gains an individual can realise in a tax year before capital gains tax applies; it cannot be carried forward.

Tax wrapper

Account or product structure, such as a pension or individual savings account, that changes the tax treatment of contributions, growth or withdrawals.

Tax-loss harvesting

Realising losses to offset taxable gains, subject to anti-avoidance rules that restrict repurchasing the same security within a set period.

Nil-rate band

Threshold of an estate chargeable to inheritance tax at zero per cent; amounts above it may be taxed at the standard rate.

Open-ended fund

Collective scheme that issues and redeems units at net asset value based on underlying holdings, so the unit price tracks the portfolio value.

Investment trust

Closed-ended company listed on an exchange whose shares trade at a market price that may differ from net asset value, often using gearing.

Exchange-traded fund

Fund traded intraday on an exchange, typically tracking an index; physical versions hold securities while synthetic versions use swaps with counterparty risk.

Discretionary management

Service where the manager can trade without prior client consent for each transaction, operating within an agreed mandate and investment policy.