UNIT 04.01-001 Flashcards
Asset allocation theory states that the primary factor underlying the variability of returns in a portfolio is based on the portfolio’s
mix of stocks, bonds, and cash.
Proponents of asset allocation feel that the mix of assets within a portfolio, rather than individual stock selection or marketing timing, is the primary factor underlying the variability of returns in portfolio performance.
“Don’t put all your eggs in one basket” is another way of describing which of these important investment concepts?
Diversification
Diversification means placing part of your portfolio into different sorts of investments to help protect against non-systematic risk. If your money is in different “baskets” the impact of systematic risks on the overall portfolio is reduced.
An INVESTMENT APPROACH that focuses on the RELATIONSHIPS among all the investments in a portfolio is known as
modern portfolio theory.
Modern portfolio theory is very concerned about the relationship between different asset classes and investments with a view to providing a portfolio return that best matches a customer’s need.
If a customer is concerned about INTEREST RATE RISK, which of the following securities is least appropriate?
A) Treasury bills
B) 5-year corporate bonds
C) 25-year municipal bonds
D) 10-year corporate bonds
25-year municipal bonds
Interest rate risk is the danger that interest rates will rise and adversely affect a bond’s price. This risk is greatest for long-term bonds; short-term debt securities are affected the least if interest rates change.
WHY would the following investments require specific disclosure regarding the cost of liquidation?
Windmill Growth Fund Class B
Windmill Growth Fund Class B
Class B shares generally have contingent deferred sales charges (back-end loads) associated with liquidation. The load reduces over the holding period, eventually dropping to zero. Customers buying Class B shares should be fully informed of the costs of selling.
An investor purchased the stock of a very well-performing technology company, expecting to receive substantial growth in the future. Shortly after he purchased the stock, the company was sued for patent infringement and lost. This reduced its product line and made serious inroads into its working capital, so that the stock declined greatly in value. This is an example of what kind of risk?
Business risk
Business risk is the uncertainty that a company’s business will not perform up to expectations. It is a risk unique to that company, which can protect against such risk through portfolio diversification.
During periods of economic decline and contraction, one would expect
gross domestic product (GDP) to ________.
gross domestic product (GDP) to decrease.
During periods of economic decline and contraction, GDP, the measure of goods and services produced, decreases. This decrease is due to a lack of consumer demand for goods and services during economic declines, which leads to rising inventories and continued lessening in production.
All of the following appear on a corporation’s balance sheet as FIXED assets except
A) computer equipment.
B) real estate.
C) inventory.
D) furniture.
C) inventory.
Inventory is considered a CURRENT asset—not a fixed asset—because the company expects to CONVERT its inventory into cash within a SHORT time.
The other choices are fixed assets and CANNOT be liquidated easily.
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Which of the following investments require that the customer receive a specific disclosure document?
Options
Options require the delivery of an option disclosure document to the customer.
