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Series 6 > S6: Evaluation of Customers > Flashcards

S6: Evaluation of Customers Flashcards

1
Q

A person looking for INCOME would want ______

A

Preferred Stock

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2
Q

Aggressive growth portfolios tend to have ______ yields

A

Low

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3
Q

Muni bonds are most suitable for investors in _______ tax bracket

A

High

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4
Q

An investor who inherits $300,000 & wants to invest for INCOME & SAFETY should invest in a portfolio of ______ not _____

A

Bonds

Stocks

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5
Q

A customer interested in tax free income would invest in a ______ mutual fund since interest is exempt from federal taxes

A

Muni bond

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6
Q

Market Risk

A
  • systematic risk
  • cannot avoid market risk by diversification
  • the risk that investors may lose some of their principal due to price volatility in the market (market price goes up/market price goes down)
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7
Q

Interest Rate Risk

A

Risk that involves the competitive cost of $

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8
Q

Inflation Risk

A

Uncertainty regarding the future purchasing power of invested dollars

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9
Q

A person looking for PRESERVATION OF CAPITAL & INCOME would be suitable for _______

A

Bonds

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10
Q

Credit Risk

A
  • AKA financial/default
  • financial default of the issuer
  • bonds backed by federal govt or municipalities tend to be very secure & have low credit risk
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10
Q

Business Risk

A
  • AKA: capital risk
  • stock specific business risk that effects the stock price (not going broke)
  • lu lu yoga
  • chance that investors might lose all of their $ or capital under circumstances unrelated to the financial strength of the issuer
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11
Q

Reinvestment Risk

A
  • risk not being able to reinvest their interest income or principal at the same rate (reaches maturity)
  • concern during periods of falling interest rates
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12
Q

Call Risk

A
  • the risk that a bond might be called before maturity

- the fact that the issuer could call the bond prior to maturity

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13
Q

Purchasing Power Risk

A
  • AKA inflationary risk
  • fixed income securities (bonds) has purchasing power risk
  • danger is the result of rising prices
  • if an investments yield is lower than the rate of inflation, the clients money will have less purchasing power as time goes on
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14
Q

Constant Dollars

A
  • is a dollar that is adjusted (indexed) for inflation
    ex: if you invested $100 a year ago, and during that year there was 10% inflation, your investment should not be worth $110 (if it isn’t you’re losing ground)
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15
Q

Current Dollar

A
  • is a dollar that is not adjusted or indexed for inflation
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16
Q

Interest Rate Risk

A
  • systematic risk
  • the sensitivity of investments price or value to function elations in interest rates
  • a bond held to maturity has no interest rate risk
  • bonds & preferred stock have more interest rate risk
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17
Q

A long term bond purchased & held to maturity has no ______

A
  • interest rate
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18
Q

Stocks & bonds would be found in the portfolio of a __________ fund

A
  • balance
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19
Q

On a risk spectrum you would find equities to the ______ of a balanced fund.

A
  • right
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20
Q

On a risk spectrum you would find fixed income securities (bond/debt) to the ______ of a balanced fund

A
  • left
21
Q

Fixed Income securities have _______ risk

A
  • inflationary
22
Q

Muni bonds are most suitable for investors in ______ tax brackets

A
  • high
23
Q

Beta Factors

(a security with a Beta Factor of one moves ______) with the market

A
  • exactly
24
Q

The 3 main suitability obligations under suitability include:

A
  • reasonable basis
  • customer specific
  • quantitative suitability
25
Q

The triggering event for the application of the suitability obligation is a _________ recommendation

A
  • broker
26
Q

Firms are required to update a clients investment profile at ________ intervals

A
  • regular
27
Q

As a registered rep, you may process _________ requests at any time. The suitability rule doesn’t apply.

A
  • unsolicited
28
Q

Systematic Risk

A
  • unpredictable & impossible to avoid

- risk of whole system

29
Q

Systematic Risks include:

A
  • market risk
  • inflationary risk
  • interest rate risk
30
Q

How do you avoid Credit Risk?

A
  • diversification

- don’t put all your eggs in one basket

31
Q

How do you avoid Business Risk?

A
  • diversification

- don’t put all your eggs in one basket

32
Q

How do you avoid Market Risk?

A
  • diversify by asset class (stocks, bonds, real estate)
33
Q

TYPES OF INVESTMENT RISKS (Diversification)

A
  • only lots of different company stocks
34
Q

Liquidity (Marketability) Risk

A
  • doesn’t want liquidity risk
35
Q

Financial Risk is greatest on ________

A
  • common stock

this is the risk that you will lose your $ due to default of the issuer

36
Q

Non-Systematic Risk

A
  • avoid by diversification (stock specific)

- business risk, credit risk, liquidity risk)

37
Q

Systematic Risk

A
  • avoid by diversification by asset class
  • CANNOT AVOID THIS RISK
  • market, inflationary, interest rate risk, currency exchange risk
38
Q

A Beta Factor of 1 on a security means that it has the ________ risk as the market in general

A
  • same
39
Q

Securities with High Beta Factors (more than 1) are ______ risky

A
  • more
40
Q

A security with a Low Beta (less than 1) is considered _____ risky

A
  • less
41
Q

A security with a Low Beta (less than 1) is known as _______ issues

A
  • defensive
42
Q

A security with a High Beta (more than 1) is known as _______ issues

A
  • aggressive
43
Q

Dollar Cost Averaging

A
  • a method of investing that requires a specified # of dollars to be invested over consecutive periods. By investing the same dollar amt, when shares are priced low, the investor will purchase more shares.
  • an average cost per share that is less than average price
  • DCA does NOT guarantee a profit
44
Q

Churning

A
  • excessive trading in a customers acct
  • the term suggests that the registered rep ignores the objectives & interests of clients & seeks only to increase commissions
45
Q

Know Your Customer Rule

A
  • every member shall use reasonable diligence in regard to opening & maintenance of every acct
46
Q

SEC Act Rule requires B/D’s to, among other things, attempt to update certain acct information every ________ regarding accts for which the B/D’s were required to make suitability determinations

A
  • 36 months
47
Q

Suitability Rule

customer means

A
  • includes a person who is NOT a broker-dealer who opens a brokerage account at a broker-dealer or purchases a security for which the broker-dealer received or will receive directly or indirectly compensation
48
Q

Suitability Rule

A
  • liquidity needs
  • time horizon
  • risk tolerance
49
Q

What’s the “triggering” event of The Suitability Rule?

A
  • a brokers recommendation
50
Q

The Suitability Rule would not apply ___________

A
  • to a recommendation made to a potential investor who does NOT act on the recommendation or executes the transaction
51
Q

3 Main Suitability Obligations

A
  • reasonable basis
  • customer specific
  • quantitative suitability

Series 6 (5 decks)

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