Investment strategies Flashcards
What is dollar cost averaging?
Process purchasing securities overtime by investing, a predetermined amount at regular intervals
Reduce the effects of market price fluctuations
Does not guarantee a positive return
What is value averaging?
Aim to have the market value of the account increase at regular intervals to predetermine amounts
Mount invested or a portion is liquidated to bring the account in line with predetermined Target
Forcing the investor to buy shares, prices are low and fewer shares and prices are high, may even sell some shares
What is share averaging?
Investor purchases the same number of shares every time amount of investment varies
What is a dividend reinvestment plan? (DRIPs)
Dividends being automatically reinvested
Reinvested dividends are treated the same for tax purposes as cash dividends
What two advantages does a bond ladder have?
Provide higher yields than a portfolio, consisting entirely of short term bonds
Because one bond mature, each year cash is available to the investor
Minimize the risk of increasing interest rates
What is the disadvantage of a bond ladder?
Reduces portfolio flexibility
What is a barbell strategy with bonds?
Very long and very short term maturity’s
What is a bond bullet strategy?
Purchasing a series of bonds with similar maturity, focused around one point in time
Effective and matching duration to the cash needs of an investor
What are disadvantages of the bond barbell strategy and the bond bullet strategy?
Large portions of a portfolio may require liquidation, resulting in significant transaction cost
What is the buy and hold strategy and what is a major benefit of it?
Strategy begins with a set percentage of assets in each class
Major benefit transaction cost, and taxes are minimized
What is passive investing, also known as indexing?
Well, diversified portfolios and have low turnover rates usually invested in indexes
By adjusting the asset mix or allocation, the risk level can be matched with the needs of the investor
What is active investing?
Believe that above market returns can be achieved through security selection, market timing or both do not believe the market is perfectly efficient
Security selection and marketing working in concert with each other
Two methods that investors used to make security selections are fundamental analysis and technical analysis
What is the four step process to shortselling?
- Stock from another investors margin account.
- Sell the borrowed stock in the open market.
- Purchased the stock in the open market.
- Replace borrowed stock.
When shorting a stock, how are dividends paid?
Pay dividend to the registered owner
How is voting handled with shortselling stocks?
Purchaser of borrowed shares has voting rights
Investor who stock with borrowed loses voting rights
The initial margin set by the federal reserve is what
50% this is the amount the investors required to fund in the margin account
What is the initial margin?
Percentage of the original purchase that must be provided by the investor currently 50%
What is the maintenance margin?
Level at which an investor will be required to add funds to the margin account usually set at 35%
What is the debit balance?
Loan amount owed to the broker amount will include the original amount plus borrowed plus any accumulated interest
What is equity in a margin account?
Value of the security less the debit balance
What is the formula for determining when a margin call will occur
What is portfolio immunization?
Immunization is to protect a bond portfolio by balancing interest rate risk and reinvestment rate risk
Should provide a stable compound rate of return that equals the yield true maturity, despite interest rate fluctuations
What are the following steps that should be taken to immunize a portfolio
Choose a time horizon that matches that of the investor
Purchase bonds with varying maturities the duration should equal the investors time horizon
Rebalance every six months to a year, this process continues until the time funds are needed
What is bond swapping?
Process of selling one debt instrument and replacing it with another with a goal of increasing the overall rate of return
What are the types of bond swapping strategies?
Substitution swap
Intermarket spread swap
Right anticipation swap
Pure yield pick up swap
Tax swap
Bond swapping strategies
What is a substitution swap?
Involves exchanging bonds with identical characteristics, but are selling for different prices
The risks associated with this are: bond may not be perfect substitute, gain may not be sufficient to cover transaction cost, time It takes for the bonds prices to equal, each other, maybe longer than originally expected, thereby reducing the realize yield for the swap
Bond swapping strategies
What is an intermarket spread swap?
Involves the exchange of one type of bond with another type of bond
Bond swapping strategies
What is a rate anticipation swap?
Rates are expected to increase long-term bonds should be swapped for short term bonds
Rates are expected to decline bonds should be purchased to capitalize on the price increase for those bonds
Bond swapping strategies
What is a pure yield pick up swap?
Involves exchanging a lower YTM bond with a higher YTM bond
New bond that replaces the old bond will have to be either a long-term bond or a lower quality bond to make the swap effective
Bond swapping strategies
What is a tax swap strategy?
Motivated by current tax law and a rising interest rate environment
Selling a bond that has declined below basis due to rising rates and replacing it with a similar, but not substantially identical bond the loss may be recognized since there is no wash sale
What is the wash sale rule?
Wash sale occurs if the taxpayer sells or exchange stock or securities for a loss and within 30 days before or after the date of the sale or exchange acquires similar security
If a wash sale takes place what is the basis of the new stock?
The new stock will include the unrecovered portion of the basis of the formally held stock or securities
To provide effective investment counseling, the following areas should be examined and reviewed
Financial goals
Risk tolerance and risk exposure
Tax situation
Liquidity and marketability needs
Analysis and evaluation of client financial statements
Client preferences, investment, understanding, and experience
What are the six steps the investment planning process?
- Determine whether the client has the means and commitment to invest.
- Determine the time horizon for investment based on the clients financial objectives.
- Determine the appropriate level of a risk and return based on the investors risk tolerance and required return
- Select investment suitable to the investors time horizon, return requirements, and risk tolerance.
- Compare the actual realize returns against the expected returns.
- Adjust and rebalance the clients portfolio as necessary.
