Suitability Flashcards
Defensive stock:
Unaffected by the business cycle
- lower risk
- lower return
- reduce market risk
Diversification helps reduce:
- Reduces the variability of the rate of return over the investment time horizon
- market risk
- standard deviation of portfolio returns
- does not affect marketability risk
Diversify a corporate bond portfolio, bonds should be selected with…
- differing maturities
- differing ratings
- different industries
- issuers if different regions of the country
- not diversification of coupon rate
Passive management:
Matching a portfolio composition to a recognized index.
- also called benchmarking
- intent to earn the return of the index (no one can outperform the market over a long period of time)
Active management:
Employs a manager to actively decide what to buy and what to sell to produce a superior return.
- more expensive than passive management
- active asset managers believe that the market is not efficient in pricing securities and that undervalued investments can be found.
- select investments into a portfolio in an attempt to exceed the return provided by a “benchmark” portfolio.
Fundamental analysis:
Evaluating a company’s balance sheet, income statement, management, marketing strategies, and research and development as a means of predicting the future, long term price movement of its stock.
Technical analysis:
Research that seeks to predict the future price movement of a stock or overall market by using: price movements, volume indicators, by using charts of a stocks past price and volume movements to predict its future price movements
Active asset manager selects investments based primarily upon:
Inefficient market pricing of the investment
Strategic asset management:
The setting of specific goals for an investment plan to be created
Tactical asset allocation:
The permitted variation to the established strategy, to take advantage of market opportunities.
*timing is the important factor
Dollar cost averaging:
The periodic investment of a fixed dollar amount into a given security.
Portfolio rebalancing:
Is used in an asset allocation scheme when a chosen asset class outperforms the others, so that its percentage allocation increases beyond the strategic limit. The excess in that class is sold off and the proceeds reinvested in the other asset classes to rebalance the portfolio back to its strategically set percentages
Value investing:
Selects stocks that they believe are good values-that is underpriced in the market. Identified by: -price/earnings ratios, -Price/book value ratios -market share -management -product line
Growth investing:
Selects investments based simply on growth in earnings or growth in market price.
- an investment strategy where a higher price is paid for a stock based upon expected return.
- assumption that these will be the best performing investments
Rebalancing:
If one asset class greatly underperforms another asset allocation plan it would need to be rebalanced.
Ladder:
Seeks to minimize interest rate risk.
Bonds are purchased with ladder maturities in 2 year intervals
-ranging from 2-20 years
Bullet:
Reduce interest rate risk.
A bond portfolio construction method that phases in purchases over defined time intervals, where all bond purchased in the portfolio have the same maturities usually intermediate term.
Barbell:
Minimize interest rate risk
Constructed only if very short term and very long term maturities
-only had 2 maturities. A very short term and a very long term (2years and 20 years)
Balloon:
Feature of a bond with serial maturities in which an unusually large amount of an issue matures at one time- usually in later years of the issues maturity dates
Income bond
NEVER a great investment.. ever. Only pays interest/ income if the corporation earns enough income.
Income mutual funds
Invest in a diversified portfolio of high interest paying bonds and high dividends paying stocks.
Older customer
Lower tax bracket
Income stream
- AAA corporate bond (higher income stream)
- CD (income stream but not as much)
- muni bad choice since already have low tax obligations.
Put aside funds for a car 5 years from now:
- money market fund
- CDs
- 5 year treasury bond
CDs:
- safe
- income stream
- safety of principal
Parents who wish to save for their kids college education:
- Growth stocks: IF they have moderate risk tolerance
- mix growth stocks and blue chip stocks: IF they have a low to moderate risk tolerance
- treasury STRIPS: IF they want to accumulate capital without having to worry about reinvestment risk and they have a very low risk tolerance
- treasury securities (in general): IF they gave NO risk tolerance
Bond recommendation for a client who wants to avoid credit risk…
- Pre refunded bonds (as safe as it gets)
- backed by escrowed government securities
- GO bonds (not as secured) but still decent
Wealthy
High risk tolerance
-short leverage inverse ETFs
Elderly
Low tax bracket
Low risk
CDs
Rising interest rates
Shorter term debt instruments
Falling interest rates
Long term debt instruments
Constant dollar investment plan:
The same aggregated dollar amount be kept invested in equities.
- maintains a fixed dollar amount of a portfolios assets in equities.
- Constant dollar amount invested in stocks.
- if the portfolio value increases above this constant amount, the excess amount of stocks is sold and invested in bonds and vises versus.
Portfolio manager sentiment is bearish:
- increase cash position
- decrease investments in stock positions
Portfolio manager sentiment is bullish:
- decrease cash position
- increase stock positions
Age 30
Investment objective of capital appreciation
Dies not need current income
100% in common stock
Most susceptible to interest rate risk:
- the risk that rising market interest rates will force bond values to fall
- long term and low coupon bonds are most susceptible to this risk (treasury bonds)
60 y old man
Current income
Preservation of capital
-trills,Money market mutual fund, CDs
To diversify a corporate bond portfolio, bonds should be selected with:
Differing maturities
Differing ratings
Different industries
Of issuers in different regions of the country
Preservation of capital:
- A client who cannot afford to lose any money and should only e recommended CDs and money market funds as an investment.
- liquidity needs
- A concern for a client who has no buffer if investment values decline.
