3.5 Averaging Techniques

Question 1

Dollar cost averaging as a portfolio management technique:

Answer 1

This technique involves investing a specific amount into an investment vehicle, regardless of whether the recent trend in the investment has been up or down.
If prices decline, the fixed investment amount will purchase a greater quantity of the security.
For the long-term investor, the presumption is that prices will eventually rise, so a lower average price translates into greater profits.

Question 2

A client has $40,000 in cash in a money market that she would like to invest in the stock market, but she is concerned that the market might not have hit bottom. You have convinced her of the merits of investing for the long term and she has decided to use a systematic approach to investing in mutual funds. She has decided that after her initial investment of $5,000, she will invest $4,000 at the end of each quarter provided that the NAV of the fund is less than her cumulative average cost basis. This is an example of which of the following strategies?

Answer 2

Averaging down involves buying when the price is below the price previously paid. Dollar cost averaging utilizes a fixed dollar amount at regular intervals regardless of price. Share averaging purchases the same number of shares and requires different dollar amounts. Averaging up is not a viable strategy; the idea is to buy low and sell high

Question 3

To be on a corporation’s books as holder-of-record (and thus have a right to the next dividend payment), the investor must purchase stock

Answer 3

two business days before the record date

Question 4

dollar cost averaging

Answer 4

more shares are purchased when prices are lower
in sales literature, dollar cost averaging cannot be referred to as averaging the dollar.
dollar cost averaging results in a lower average cost per share