Suitability

Question 1

Defensive stock:

Answer 1

Unaffected by the business cycle

• lower risk
• lower return
• reduce market risk

Question 2

Diversification helps reduce:

Answer 2

• Reduces the variability of the rate of return over the investment time horizon
• market risk
• standard deviation of portfolio returns
• does not affect marketability risk

Question 3

Diversify a corporate bond portfolio, bonds should be selected with…

Answer 3

• differing maturities
• differing ratings
• different industries
• issuers if different regions of the country
• not diversification of coupon rate

Question 4

Passive management:

Answer 4

Matching a portfolio composition to a recognized index.

• also called benchmarking
• intent to earn the return of the index (no one can outperform the market over a long period of time)

Question 5

Active management:

Answer 5

Employs a manager to actively decide what to buy and what to sell to produce a superior return.

• more expensive than passive management
• active asset managers believe that the market is not efficient in pricing securities and that undervalued investments can be found.
• select investments into a portfolio in an attempt to exceed the return provided by a “benchmark” portfolio.

Question 6

Fundamental analysis:

Answer 6

Evaluating a company’s balance sheet, income statement, management, marketing strategies, and research and development as a means of predicting the future, long term price movement of its stock.

Question 7

Technical analysis:

Answer 7

Research that seeks to predict the future price movement of a stock or overall market by using: price movements, volume indicators, by using charts of a stocks past price and volume movements to predict its future price movements

Question 8

Active asset manager selects investments based primarily upon:

Answer 8

Inefficient market pricing of the investment

Question 9

Strategic asset management:

Answer 9

The setting of specific goals for an investment plan to be created

Question 10

Tactical asset allocation:

Answer 10

The permitted variation to the established strategy, to take advantage of market opportunities.
*timing is the important factor

Question 11

Dollar cost averaging:

Answer 11

The periodic investment of a fixed dollar amount into a given security.

Question 12

Portfolio rebalancing:

Answer 12

Is used in an asset allocation scheme when a chosen asset class outperforms the others, so that its percentage allocation increases beyond the strategic limit. The excess in that class is sold off and the proceeds reinvested in the other asset classes to rebalance the portfolio back to its strategically set percentages

Question 13

Value investing:

Answer 13

Selects stocks that they believe are good values-that is underpriced in the market. 
Identified by:
-price/earnings ratios,
-Price/book value ratios
-market share
-management 
-product line

Question 14

Growth investing:

Answer 14

Selects investments based simply on growth in earnings or growth in market price.

• an investment strategy where a higher price is paid for a stock based upon expected return.
• assumption that these will be the best performing investments

Question 15

Rebalancing:

Answer 15

If one asset class greatly underperforms another asset allocation plan it would need to be rebalanced.

Question 16

Ladder:

Answer 16

Seeks to minimize interest rate risk.
Bonds are purchased with ladder maturities in 2 year intervals
-ranging from 2-20 years

Question 17

Bullet:

Answer 17

Reduce interest rate risk.
A bond portfolio construction method that phases in purchases over defined time intervals, where all bond purchased in the portfolio have the same maturities usually intermediate term.

Question 18

Barbell:

Answer 18

Minimize interest rate risk
Constructed only if very short term and very long term maturities
-only had 2 maturities. A very short term and a very long term (2years and 20 years)

Question 19

Balloon:

Answer 19

Feature of a bond with serial maturities in which an unusually large amount of an issue matures at one time- usually in later years of the issues maturity dates

Question 20

Income bond

Answer 20

NEVER a great investment.. ever. Only pays interest/ income if the corporation earns enough income.

Question 21

Income mutual funds

Answer 21

Invest in a diversified portfolio of high interest paying bonds and high dividends paying stocks.

Question 22

Older customer
Lower tax bracket
Income stream

Answer 22

• AAA corporate bond (higher income stream)
• CD (income stream but not as much)
• muni bad choice since already have low tax obligations.

Question 23

Put aside funds for a car 5 years from now:

Answer 23

• money market fund
• CDs
• 5 year treasury bond

Question 24

CDs:

Answer 24

• safe
• income stream
• safety of principal

Question 25

Parents who wish to save for their kids college education:

Answer 25

- Growth stocks: IF they have moderate risk tolerance - mix growth stocks and blue chip stocks: IF they have a low to moderate risk tolerance - treasury STRIPS: IF they want to accumulate capital without having to worry about reinvestment risk and they have a very low risk tolerance - treasury securities (in general): IF they gave NO risk tolerance

Question 26

Bond recommendation for a client who wants to avoid credit risk...

Answer 26

- Pre refunded bonds (as safe as it gets) * backed by escrowed government securities - GO bonds (not as secured) but still decent

Question 27

Wealthy | High risk tolerance

Answer 27

-short leverage inverse ETFs

Question 28

Elderly Low tax bracket Low risk

Answer 28

CDs

Question 29

Rising interest rates

Answer 29

Shorter term debt instruments

Question 30

Falling interest rates

Answer 30

Long term debt instruments

Question 31

Constant dollar investment plan:

Answer 31

The same aggregated dollar amount be kept invested in equities. - maintains a fixed dollar amount of a portfolios assets in equities. - Constant dollar amount invested in stocks. - if the portfolio value increases above this constant amount, the excess amount of stocks is sold and invested in bonds and vises versus.

Question 32

Portfolio manager sentiment is bearish:

Answer 32

- increase cash position | - decrease investments in stock positions

Question 33

Portfolio manager sentiment is bullish:

Answer 33

- decrease cash position | - increase stock positions

Question 34

Age 30 Investment objective of capital appreciation Dies not need current income

Answer 34

100% in common stock

Question 35

Most susceptible to interest rate risk:

Answer 35

* the risk that rising market interest rates will force bond values to fall - long term and low coupon bonds are most susceptible to this risk (treasury bonds)

Question 36

60 y old man Current income Preservation of capital

Answer 36

-trills,Money market mutual fund, CDs

Question 37

To diversify a corporate bond portfolio, bonds should be selected with:

Answer 37

Differing maturities Differing ratings Different industries Of issuers in different regions of the country

Question 38

Preservation of capital:

Answer 38

- A client who cannot afford to lose any money and should only e recommended CDs and money market funds as an investment. * liquidity needs - A concern for a client who has no buffer if investment values decline.