Unit 7 Quiz Review Flashcards
Risks that are unique to a specific industry, business type, or an investment type are known as:
A)Systematic risks
B) security risks
C) Nonsystematic risks
D) Stock market risks
C. Non systematic risks are those that are unique to specific industry, business enterprise, or investment type.
LO 7.a
An investor has a bond maturing during a time when interest rates are falling. It is likely the investor, wanting to keep the funds invested, would be most concerned with:
A. Inflation risks
B. Reinvestment risks
C. Business risks
D. Purchasing power risk
B. When interest rates are declining, it is difficult to invest proceeds from redemption or distributions and maintain the same level of income one previously had without increasing credit or market risks. This is reinvestment risk.
The Dow Jones Industrial average ( DJIA) is a widely cited measure of the performance of the US stock market. How many sticks are tracked on average?
A. 30
B. 3000
C. 400
D. 500
A. The DJIA consists of 30 stocks. The relative concentration of stocks. Makes this average more volatile than indices that contain a larger sampling. It is popular with retail investors.
The term investment strategy apply a to all the following except:
A. The customer’s position in real estate
B. The customer’s preference in bond investments
C. The customer’s investment goals.
D. How much the customer may reasonably invest.
A. Investment strategy refers to information that can lead to suitable recommendations for a customer investments in securities. Though many invest in asap that are not securities, such as real estate or art, not being securities, the term investment strategy does not apply to these assets.
LO 7.d
Regarding different types of risk, which of the following is true?
A. Change in regulations represent potential legislative risk.
B. Enactment of, or change in, laws represent political risk
C. Enactment of, or change in laws represent political risk
D. Change in regulations represent political risk
B. The enactment of changes, in laws represent potential legislation risk, whereas enactment of, or changes in, regulations represent regulatory risk. Political risk is specific to potential instability associated more with emerging economies.
LO 7.a
Interest rate risk
A. Occurs when interest rates rise, pushing bond prices higher
B. Cannot be reduced by diversification
C. Is often called purchasing power risk
D. Occurs when interest rates fall, pushing bond prices lower
B. Interest rate risk is one of the systematic risks that can I be reduced by diversification. It is the risk that fluctuating interest rates will impact bond prices. Primarily when interest rates are rising, bond prices push lower.
LO 7.a
Which of the following has the most liquidity risk?
A. Treasury bonds
B. Limited Partnerships
C. Stocks listed on NASDAQ
D. Listed REITS
B. Limited partnerships are generally liquid; the other options are actively traded securities.
LO 7.a
Which of the following investments would not require heightened suitability requirements before recommending them to your clients?
A. A hedge fund
B. An oil and gas limited partnership
C. An exchange - traded note ( ETN)
D. All utilities mutual fund
D.Mutual funds are generally suitable for a broad class of investors . ETNs , limited partnerships, and hedge funds all have specific suitability requirements.
New Haven Farms is a producer of specialty foods. They recently received a notice that the wetlands maintenance and Drainage ACT ( The WMD ACT) passed indicates that a significant portion of their current land used in food production falls under the acts protection and may no longer be used for agriculture. This is an example of:
A. Political risk
B. Business risk
C. Regulatory Risk
D. Legislative risk
D. The best answer is legislative risk, as this was caused by a change in the law. Regulatory risk is a change in the application of existing rules, while political risk is normally associated with a change in leadership. Business risk would be a bad business plan, not a working business plan damaged by changing laws.
L0 7a
Which of the following is an investment recommendation?
A. A representative cold calls a potential customer and asks to set up an appointment
B. In response to a customer’s request about bond investments, a representative provides information about the Fund
C. In response to a customer’s request about bond investments, a representative provides information on the Windmill bond fund
D. During a presentation, a representative uses. Chart if the S &p 500 demonstrate the history of the stock market.
C. If a representative introduces a specific product in response to a customers generic question, it would be seen as a recommendation. Simply trying to schedule an appointment is not an investment recommendation. If a representative provides information on a specific investment that a customer has requested, it is not a recommendation. Basic information on the markets will not be considered a recommendation.
LO 7.c
