Investment Strategies

Question 1

Market timing

Answer 1

-attempt to buy low and sell high
- short term price patterns
- some use fundamentals to pick securities then rely on market timing to trade

Question 2

Passive investing (indexing)

Answer 2

• weight portfolio to match a broad based index such as S&P to try to match its performance
• index funds

Question 3

Buy and hold

Answer 3

EMH is to employ passive strategy
- no active strategy could beat a truly efficient market
- buying securities and holding them until needed

Question 4

Portfolio immunization

Answer 4

• passive strategy to safeguard bond portfolio against interest rate volatility
  -average duration of portfolio is made equal to preselected time horizon

Question 5

Bond swaps

Answer 5

• entails selling a certain bond or bonds and replacing it with another

Question 6

Stock option collar

Answer 6

• hedging strategy
• investor owns stock and wants to hedge against the stock declining in value
• sells call at one strike price (out of the money)
• buying put at lower strike price (out of the money)

3 simultaneous positions
- long in the stock (owns it)
- short in the call (sold call received premium)
- long in the put (owns it and pays premium)

• obtains downside protection but limits upside potential

Question 7

Floating rate note collar

Answer 7

• floating rate note is debt with variable interest rate
• collar specifies max and min rate of interest that will be paid on a floating rate note
• tied to t-bills or other MM
• usually mature in 5 years and interest adjustments made periodically
• provide protection but pay lower yields than fixed rate at same maturity

Question 8

Dollar cost averaging

Answer 8

• equal amount of dollars is invested each period

Question 9

Laddered portfolio

Answer 9

• bonds are purchased with different maturity dates
• as each bond matures a new longer term bond is purchased

Question 10

Bullets

Answer 10

• investor purchases intermediate duration bonds an does not acquire long duration or short duration bonds

Question 11

Barbells

Answer 11

• half short term and half long term bonds
• requires periodic rebalancing

Question 12

Investing on margin

Answer 12

• Reg T sets initial margin at 50%
• only for actively traded securities, not MF or options (NYSE, AMEX, NASDAQ qualify)
• second level margin regulation is by exchanges and FINRA (25%), minimum maintenance after Reg T met
• Reg T margin required to open it
• maintenance margin required to keep it

Question 13

Maintenance margin formula

Answer 13

margin requirement = (1 - initial margin percentage) / (1 - maintenance margin percentage) * purchase price of stock

Question 14

Short Selling

Answer 14

• believes stock value will decline
• need margin account
• net proceeds from sale plus required margins are held by the broker
• no funds are immediately received by the short seller
• no time limit
• dividends on short stock must be covered by short seller

Question 15

Option straddles and combinations

Answer 15

• thinks there will be future movement but doesnt know in which direction
• will profit as long as either side goes in the money greater than the combined premium

Question 16

Protective put

Answer 16

• holding a long position in stock and buying put for it
• put acts as insurance against decline
• costs premium

Question 17

Currency futures

Answer 17

• contracts for future delivery of currencies
• hedge positions to lock in price of currency and avoid risk associated with foreign currency