Investment strategies

Question 1

What is dollar cost averaging?

Answer 1

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

Question 2

What is value averaging?

Answer 2

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

Question 3

What is share averaging?

Answer 3

Investor purchases the same number of shares every time amount of investment varies

Question 4

What is a dividend reinvestment plan? (DRIPs)

Answer 4

Dividends being automatically reinvested

Reinvested dividends are treated the same for tax purposes as cash dividends

Question 5

What two advantages does a bond ladder have?

Answer 5

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

Question 6

What is the disadvantage of a bond ladder?

Answer 6

Reduces portfolio flexibility

Question 7

What is a barbell strategy with bonds?

Answer 7

Very long and very short term maturity’s

Question 8

What is a bond bullet strategy?

Answer 8

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

Question 9

What are disadvantages of the bond barbell strategy and the bond bullet strategy?

Answer 9

Large portions of a portfolio may require liquidation, resulting in significant transaction cost

Question 10

What is the buy and hold strategy and what is a major benefit of it?

Answer 10

Strategy begins with a set percentage of assets in each class

Major benefit transaction cost, and taxes are minimized

Question 11

What is passive investing, also known as indexing?

Answer 11

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

Question 12

What is active investing?

Answer 12

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

Question 13

What is the four step process to shortselling?

Answer 13

1. Stock from another investors margin account.
2. Sell the borrowed stock in the open market.
3. Purchased the stock in the open market.
4. Replace borrowed stock.

Question 14

When shorting a stock, how are dividends paid?

Answer 14

Pay dividend to the registered owner

Question 15

How is voting handled with shortselling stocks?

Answer 15

Purchaser of borrowed shares has voting rights

Investor who stock with borrowed loses voting rights

Question 16

The initial margin set by the federal reserve is what

Answer 16

50% this is the amount the investors required to fund in the margin account

Question 17

What is the initial margin?

Answer 17

Percentage of the original purchase that must be provided by the investor currently 50%

Question 18

What is the maintenance margin?

Answer 18

Level at which an investor will be required to add funds to the margin account usually set at 35%

Question 19

What is the debit balance?

Answer 19

Loan amount owed to the broker amount will include the original amount plus borrowed plus any accumulated interest

Question 20

What is equity in a margin account?

Answer 20

Value of the security less the debit balance

Question 21

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

Answer 21

Question 22

What is portfolio immunization?

Answer 22

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

Question 23

What are the following steps that should be taken to immunize a portfolio

Answer 23

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

Question 24

What is bond swapping?

Answer 24

Process of selling one debt instrument and replacing it with another with a goal of increasing the overall rate of return

Question 25

What are the types of bond swapping strategies?

Answer 25

Substitution swap Intermarket spread swap Right anticipation swap Pure yield pick up swap Tax swap

Question 26

Bond swapping strategies What is a substitution swap?

Answer 26

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

Question 27

Bond swapping strategies What is an intermarket spread swap?

Answer 27

Involves the exchange of one type of bond with another type of bond

Question 28

Bond swapping strategies What is a rate anticipation swap?

Answer 28

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

Question 29

Bond swapping strategies What is a pure yield pick up swap?

Answer 29

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

Question 30

Bond swapping strategies What is a tax swap strategy?

Answer 30

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

Question 31

What is the wash sale rule?

Answer 31

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

Question 32

If a wash sale takes place what is the basis of the new stock?

Answer 32

The new stock will include the unrecovered portion of the basis of the formally held stock or securities

Question 33

To provide effective investment counseling, the following areas should be examined and reviewed

Answer 33

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

Question 34

What are the six steps the investment planning process?

Answer 34

1. Determine whether the client has the means and commitment to invest. 2. Determine the time horizon for investment based on the clients financial objectives. 3. Determine the appropriate level of a risk and return based on the investors risk tolerance and required return 4. Select investment suitable to the investors time horizon, return requirements, and risk tolerance. 5. Compare the actual realize returns against the expected returns. 6. Adjust and rebalance the clients portfolio as necessary.