Investment Strategies

Question 1

The process of purchasing securities over time by investing a predetermined amount at regular intervals is:

Answer 1

dollar cost averaging

Question 2

What strategy aims to have the market value of the account increase at regular intervals to predetermined amounts?

Answer 2

Value averaging

Question 3

What strategy has the investor purchase the same number of shares every time?

Answer 3

Share averaging

Question 4

Two advantages of the laddered portfolio strategy are:
__________ yields than a portfolio of only short term bonds and;
because one bond matures each year, _________ is available to the investor.

They may also be used to purchase another bond with a 10-yr maturity that will maintain the original structure of the bond portfolio and minimize the risk of ___________ interest rates.

Answer 4

1. Higher
2. Cash
3. Increasing

Question 5

An important disadvantage of the ladder strategy is that it reduces portfolio _____________, and all of the bonds may need to be _______________ in the event the investor wishes to restructure the portfolio.

Answer 5

1. Flexibility
2. Liquidated

Question 6

An advantage of the barbell strategy is that in the event the portfolio needs restructuring as a result of fluctuating ______________, only one group of bonds needs _________________.

Answer 6

1. Interest rates
2. to be sold

Question 7

In the bullet strategy, Investors purchase a series of bonds with _____________ that are focused around _______________.

Answer 7

1. Similar maturities
2. One point in time

Ex. Investor wants all bonds to mature in ten years. He buys two bonds with 10 year maturity, two with 8 years, 2 with 6 years, etc.

Question 8

The buy-and-hold strategy begins with a set _____________ in each asset class. A major benefit is that_______________________ are minimized.

Answer 8

1. % of assets
2. transaction costs and taxes

Question 9

Passive portfolios are generally ____________ and have low ____________. By adjusting the ________________, the risk level can be matched with the needs of the investor. Based on the concept that markets are efficient in _____________________. AKA ______________

Answer 9

1. well diversified
2. turnover rates
3. asset mix/allocation
4. Pricing securities
5. Indexing

Question 10

How are dividends treated in a short sale of stock?

Answer 10

The issuing corporation pays dividends to the registered owner–purchaser of the borrowed shares. The short seller is required to make payment in lieu of dividends to the investor whose stock was borrowed.

Question 11

What is the initial margin in a margin transaction?

Answer 11

The percentage of the original purchase that must be provided by the investor (currently 50%). Is set by the Fed, but brokerages may have more stringent requirements

Question 12

What is the maintenance margin in a margin transaction?

Answer 12

the level at which an investor will be required to add funds to the margin account. Usually 35%

Question 13

What is the formula for determining when a margin call will occur?

Answer 13

Margin call = debit balance (loan amount owed to broker + accumulated interest) / 1 - maintenance margin

Note: you must use the current market price, not the original purchase price, to calculate required equity.

Question 14

The goal of immunization is to protect a bond portfolio by balancing which types of risk?

Answer 14

Interest rate risk and reinvestment rate risk

Question 15

A portfolio is immunized when:

Answer 15

the realized rate of return is at least the computed YTM calculated at inception

More simply, when the actual future value is at least as great as it had been expected at inception

Question 16

A bond portfolio will be initially immunized at which the _______ of a bond portfolio equals the time horizon for a financial goal

Answer 16

Duration

Question 17

After choosing a time horizon matching investor goal, what is the next step in the bond immunization process?

Purchase bonds with _________________, both less than and greater than the time horizon. The ________________ of the portfolio should equal the time horizon.

Answer 17

1. varying maturities
2. duration

Question 18

What is an alternative to bond immunization?

Answer 18

Purchase all zero-coupon bonds with maturities equal to the desired time horizon.

Since the duration of a zero-coupon bond equals its time to maturity, the bond is considered immunized at its point of maturity

Question 19

What is an important ongoing step for bond portfolio immunization?

Answer 19

Rebalancing

Should be rebalanced every six months to a year. If ten year horizon, after six months, portfolio should be rebalanced so that duration equals 9.5 instead of 10 years.

Question 20

___________ is the process of selling one debt instrument and replacing it with another with the goal of increasing the overall rate of return.

Answer 20

Bond Swapping

Question 21

A substitution swap involves exchanging bonds with _____________ selling for different prices.

Answer 21

identical characteristics

including: credit rating, maturity, coupon interest payment, and call feature

Question 22

Risks associated with a substitution swap include:

Answer 22

1. bonds may not be perfect substitutes for each other
2. gain may not be sufficient to cover required transaction costs
3. the workout time, which is the time it takes for the bond’s prices to equal each other, may be longer than expected, reducing the realized yield for the swap

Question 23

The _________________ involves the exchange of one type of bond (government bond) for another type (corporate bond).

Answer 23

Intermarket spread swap

Question 24

The goal of an Intermarket spread swap is to:

Answer 24

capitalize on a YTM disparity across bond markets.

Occurs when investors believe one type of bond is currently mispriced in relation to the other.

Question 25

In a rate anticipation swap, if rates are expected to ________, long-term bonds should be swapped for short-term bonds

Answer 25

Increase

Question 26

In a rate anticipation swap, if rates are expected to ________, long-term bonds should be purchased to capitalize on the price increases for these bonds

Answer 26

Decrease

Question 27

The ______________ Swap involves exchanging a lower YTM bond with a higher YTM bond

Answer 27

Pure Yield Pickup

Question 28

In a pure yield pickup swap, the new bond that replaces the old bond will have to be either a _______ term bond or a _________ quality bond to make the swap effective.

Answer 28

Longer, Lower

Question 29

A __________ swap involves selling a bond that has declined below basis due to rising rates and replacing it with a similar, but not substantially identical, bond.

Answer 29

Tax Swap

Question 30

Which bond swap does this exemplify:
A bond that was purchased for $1,000 now trades for $800. Selling the bond provides $800 to invest and a capital loss of $200. The investor can then use the proceeds to repurchase a similar bond for $800.

Answer 30

Tax Swap.

Since the bond purchased was not substantially identical, the loss may be recognized since there is no wash sale.

Question 31

A wash sale occurs if the taxpayer sells or exchanges stock or securities for a loss and, within ____ days before or after the date of the sale/exchange, acquires similar securities

Answer 31

30 days

Question 32

Much of the fixed-income portion of an individual’s portfolio should be allocated to _____________ accounts, while much of the portfolio that consists of appreciating assets should be held outside of ______________ accounts

Answer 32

Tax-deferred

Question 33

What is step 1 of the investment planning process?

Answer 33

Determine whether the client has the means and commitment to invest

Question 34

What is step 2 of the investment planning process?

Answer 34

Determine the time horizon for investment based on the client’s financial objective

Question 35

What is step 3 of the investment planning process?

Answer 35

Determine the appropriate level of risk and return for the portfolio based on the investor’s risk tolerance and required return

Question 36

What is step 4 of the investment planning process?

Answer 36

Select investments suitable to the investor’s time horizon, return requirements, and risk tolerance

Question 37

What is step 5 of the investment planning process?

Answer 37

Compare the actual realized returns against the expected returns

Question 38

What is step 6 of the investment planning process?

Answer 38

Adjust and rebalance the client’s portfolio, as necessary

Question 39

If a client does not have an emergency fund or access to funds in case of an emergency, investments that have the potential for large price fluctuations, such as common stock, should make up a _______ portion of the overall portfolio. Likewise, investments that do not have ___________, such as real estate, should be limited.

Answer 39

1. Smaller
2. Efficient markets

Question 40

The statement of financial position provides the planner with a list of assets stated at ______ and the current balance of any corresponding debt

Answer 40

FMV

Question 41

________________ – are the changes brought about by the normal course of events and can be ignored – cost of living salary increases, normal market volatility

Answer 41

Incremental Changes

Question 42

_________________ – a radical departure from current trends or patterns – deep recessions, a sudden job loss or unexpected inheritance. Discontinuous change requires a reassessment of the assumptions and strategies employed in the Investment Policy Statement

Answer 42

Discontinuous changes

Question 43

Planners should affirm the importance of a _____-term perspective and guard against ______-term fear resulting in unnecessary micromanagement of the portfolio

Answer 43

1. Long term perspective
2. Short term fear