UNIT 04.02-001 Flashcards
Your customer is 24 years old, earning $20,000 a year, and seeking to invest $1,000. She does not want a fund that undergoes extreme fluctuations in net asset value. Instead, she is looking for maximum diversification and will accept a moderate amount of risk. Which of the following mutual funds is most suitable for this customer?
ABC Asset Allocation Fund
This customer is a young investor with a relatively small amount to invest and a goal of maximum diversification. An asset allocation fund allows her small investment to benefit from the return potential of the stock, bond, and short-term debt markets.
While prospecting for clients, you discover a potential investor who is 88 years old, retired, living on his savings, has never invested, and has very high medical expenses. As a registered representative, you would recommend
that no investment account be opened due to his financial situation.
This prospect is retired, has limited funds, and has no investment experience. In addition, he has high medical expenses and must draw from his savings to support himself. This prospect’s profile makes opening an account an unsuitable recommendation.
In order to MINIMIZE liquidity risk, you recommend which of the following to a 37-year-old prospect?
A growth mutual fund
Listed stock on the NYSE
Liquidity risk is the inability to turn an investment into cash quickly at its fair market value without losing significant principal. Mutual funds have a guaranteed buyer (the investment company), and stock that trades on the NYSE has virtually no liquidity risk because it is easy to find a buyer. However, an annuity, because of surrender charges and early withdrawal penalties, is not considered liquid, and real estate may take months or longer to sell and is a prime example of an illiquid investment.
Which of the following is a financial consideration?
A) A customer’s favorite pastime
B) How many children does a customer have
C) A customer’s IRA balance
D) A customer’s college major
A customer’s IRA balance
Financial considerations are those that are expressed as a dollar amount of a stream of payments. Financial considerations may be found on a customer’s balance sheet or income statement.
Which of the following would be found on a customer’s balance sheet?
A) The value of a customer’s comic book collection
B) The customer’s income
C) The customer’s alma mater
D) The customer’s monthly debt service
The value of a customer’s comic book collection
Information on a balance sheet will be financial assets and liabilities. Income and expense information is on the income statement. Where you went to school is a non-financial consideration.
Which of the following mutual funds would be suitable for an investor who requires TAX-EXEMPT DIVIDENDS?
Municipal bond fund
Municipal bonds pay tax-exempt interest. When the portfolio of the mutual fund is composed of municipal bonds, the fund’s dividend is also tax exempt.
A registered representative would likely be accused of a prohibited practice if he encouraged a customer to switch her mutual fund when
the fund’s ranking changes in her favorite financial periodical.
Significant changes in an investor’s investment objective, tax status, or retirement planning may be justification for switching from one fund to another. Constantly switching to a higher-rated fund (“chasing the leader”) can result in continual tax exposures and possibly new sales loads. When a switch between funds occurs, the shareholder must recognize any capital gain or loss.
When a registered representative is deciding on the suitability of a particular investment for a customer, that customer’s need for liquidity is
an important element to be considered.
Liquidity is a very important factor when determining suitability for a customer.
A registered representative is preparing a profile on one of his customers. Which of the following should he list as a nonfinancial consideration?
The amount of money the customer is willing to _____
The amount of money the customer is willing to risk
Financial considerations involve real assets or debts, whether part of total income, debt, or net worth.
The amount of money the customer is willing to risk involves ATTITUDE, not something that can be placed on a balance sheet or income statement, and is thus nonfinancial.
An investor is in a low tax bracket and wishes to invest a moderate sum in an investment that will provide some PROTECTION FROM INFLATION.
Which of the following should you recommend?
______-cap common stock mutual fund
Mid-cap common stock mutual fund
Mid-cap stocks have historically provided good hedges against inflation, making them appropriate for an investor seeking long-term growth and inflation protection.
