Asset Allocation and Portfolio Diversification - Review Questions Flashcards
Which of the following investments would you recommend for your client’s liquidity needs?
1) High Yield Bond
2) Foreign Stock
3) Money Market Fund
4) Land
5) Shares of a Partnership
3) Money Market Fund
Place the typical investment life stages in order from the lowest risk tolerance to the highest risk tolerance.
1) Accumulation, Consolidation, Distribution
2) Consolidation, Accumulation, Distribution
3) Distribution, Consolidation, Accumulation
4) Consolidation, Distribution, Accumulation
3) Distribution, Consolidation, Accumulation
Typically clients have a low risk tolerance when in a distribution phase and a higher risk tolerance when they are younger and in the accumulation stage. Once in a consolidation and distribution phase, the risk tolerance continues to decline.
How is a benchmark portfolio used in an investment policy? (Check all that are true.)
1) Security selection
2) Measure performance against
3) Reference point for return objectives
4) Reference point for risk objectives
5) Diversification
2) Measure performance against
3) Reference point for return objectives
4) Reference point for risk objectives
Funds are professionally managed based on a previously determined strategy. Investors do not get to choose which securities should be purchased or sold.
Strategic asset allocation (SAA) is the portion of the portfolio that has asset class mix for long-term portfolio objectives. Tactical asset allocation (TAA) is the portion of the portfolio designed to profit from temporary market disequilibria
Choose the best answer.
True False
True
SAA is the asset mix that is intended to accomplish investment objectives over the long run. TAA is designed to deviate from SAA when temporary market conditions make it profitable to do so.
Your client, Jack, has an IPS that states he should keep a 60/40 stock to bond strategic allocation. If his total account value is $500,000 and stocks are up this year by 20% while bonds are down 5% what is Jack’s current allocation if you have not rebalanced?
Choose the best answer.
1) 65% Stock/ 35% Bonds
2) 60% Stocks/ 40% Bonds
3) 62.5% Stock/ 37.5% Bonds
4) 57.5% Stock/ 42.5% Bonds
1) 65% Stock/ 35% Bonds
If Jack has $500K allocated as 60/40 he has $300K in stocks and $200k in bonds. If stocks go up 20% and bonds go down 5% this becomes $360K/$190K which equals 65%/35%.
How much money needs to be moved from stocks to bonds to rebalance Jack’s portfolio to the proper allocation - If stocks go up 20% and bonds go down 5% this becomes $360K/$190K which equals 65%/35%.
Choose the best answer.
1) $60,000
2) $15,000
3) $30,000
4) No rebalancing is needed.
3) $30,000
Jack has a strategic allocation of 60/40 in his IPS. Jack now has $360K/$190K which equals 65%/35%. Based on the new dollar amount of $550K Jack needs $330K in stocks and $220K in bonds, so you would sell $30k of stock and move it to bonds.
All of the following are correct about the investment policy statement, EXCEPT:
1) It should include a list of specific securities permissible for purchase in the portfolio.
2) It should include authorization and identification of the investment manager.
3) It should include timelines for rebalancing the portfolio.
4) It should include a timeline for reviewing the investment results.
1) It should include a list of specific securities permissible for purchase in the portfolio.
The investment policy statement (IPS) generally does not include a specific security list. It should include broad guidelines for investment selection.
According to fundamental analysis, which phrase best defines the intrinsic value of a share of common stock?
1) The discounted value of all the future dividends of the stock.
2) The stock’s current price in an inefficient market.
3) The book value of the common stock.
4) The par value of the common stock.
1) The discounted value of all the future dividends of the stock.
The intrinsic value of any asset is the present value of the future income that it can be expected to generate.
Fundamental and technical analysis have which of the following in common?
1) A minimum of 8-12 months is necessary in order to validate either process.
2) Past price movements are predictive of future price movements.
3) Technical analysis can only apply to the general market and not to individual securities.
(1), (2) and (3)
(3) only
(1) and (2) only
None of the above
None of the above
None of these statements encompass both fundamental and technical analysis. (1) has no basis in either type of analysis. (2) is a belief in technical analysis, but not fundamental analysis. (3) would be strongly argued against by a technical analyst
When considering a client’s risk tolerance what are two key factors to analyze what the proper risk tolerance should be?
1) Ability to take on risk and return goals
2) Willingness to take on risk and time frame
3) Ability to take on risk and willingness to take on risk
4) Time frame and liquidity needs
3) Ability to take on risk and willingness to take on risk
Ability to take on risk refers to the client’s financial ability and willingness to take on risk refers to the client’s personal preferences. These are the two key factors to assess actual risk tolerance. Return goals are important but may not be in sync with risk tolerance. Time frames and liquidity needs are constraints to risk tolerance.
Sandra has a large cash balance in her self-directed retirement savings plan that she wants to invest. Which of the following factors is least likely to influence her attitude about various plan-eligible investment vehicles?
1) Her age.
2) Her marginal tax rate.
3) Her existing holdings.
4) Her past investment experience.
2) Her marginal tax rate.
Investment income in her retirement savings plan is tax-deferred, so her marginal tax rate will not impact her in-plan investment returns.
