Investment Strategies

Question 1

Market Timing

Answer 1

• forecasting of the direction of the financial markets, usually in the short-term.
• portfolio managers or individual investors time their specific security purchase while remaining, for the most part, fully invested in the overall market.
• academic studies show that this strategy does not work

Question 2

Buy and Hold

Answer 2

• A type of passive strategy
• major benefit is that transaction costs and taxes are minimized.
• the investor is not out of the market during an upturn in prices or during its most profitable trading days,

Question 3

Portfolio Immunization

Answer 3

• investors look for bonds whose maturities (or duration) approximate their stipulated investment horizon in order to reduce interest rate and reinvestment rate risk.
• use duration and not maturities when utilizing this strategy.

Question 4

Swaps

Answer 4

• two investors agree to swap or exchange their investments, generally obligations (such as bonds) that make specified payment streams.
• EX: an investor in need of a fixed payment stream, but holding a variable payment stream investment, will swap that investment with another investor that is in need of a fixed payment stream.

Question 5

Interest Rate Collar

Answer 5

• the simultaneous purchase of an interest rate cap and the sale of an interest rate floor on the same index involving the same principal amount. The cap protects against rising interest rates whereas the sale of the interest rate floor generates premium income to the investor.
• it creates an effective range within which the buyer’s effective interest rate will fluctuate

Question 6

Dollar Cost Averaging

Answer 6

• a formula plan for investment transactions, in which a fixed dollar amount is invested in a security (like a mutual fund) at fixed intervals.
• goal is to reduce the effects of price fluctuations.

Question 7

Bond Ladder

Answer 7

• an investment strategy wherein an equal amount of money is invested in a series of bonds with staggered maturities.
• can also be used with bank CD’s

Question 8

Bond Bullet

Answer 8

• a strategy for having several non-callable bonds mature at the same time
• interest rate risk is minimized due to the varying maturity dates (and durations) of the bonds.

Question 9

Bond Barbell

Answer 9

• involves purchasing both short-term and long-term bond issues.
• the longer term end of the barbell allows the investor to lock in attractive long term interest rates, whereas the shorter term end ensures that the investor will have the opportunity to reinvest in other assets if the bond market declines in value.

Question 10

Margin Requirement

Answer 10

-is currently 50% as established by Reg T of the SEC and the Federal Reserve

Question 11

Maintenance Margin

Answer 11

• the required portion of equity to the total value of the stock.
• currently 25%

Question 12

Margin Calls

Answer 12

-if your stock drops below the 25% maintenance margin threshold, the account is considered “under margined” and the investor must provide more equity (cash) to the broker/dealer

Question 13

Margin Rules of Thumb

Answer 13

• debt always stays the same
• work at it backwards - from the debt
• when the debt is greater than 70%, that triggers a margin call.

Question 14

Spread

Answer 14

-the simultaneous purchase of one option and the sale of another option on the same side or position within the market.

Question 15

Call Spread

Answer 15

-the purchase of a call option and the sale of a call option at the same time

Question 16

Straddle

Answer 16

-the simultaneous purchase of one potion and the purchase of another option on the opposite side of the position

Question 17

Long Straddle

Answer 17

• simultaneous purchase of a call option and a put option with the same exercise and expiration date.
• Would use when the investor expects major movement in the price of the asset, but unsure of which way.